Short Duration Mutual Funds

A short duration fund is a debt fund with a portfolio Macaulay duration between 1 year and 3 years. A mutual fund is a pool of money from many people, invested by a professional manager under SEBI rules. A debt fund lends that money out by buying bonds and similar paper from governments, banks or companies.

Macaulay duration measures how long, on average, a bond takes to pay you back. Each payment's wait counts in proportion to what that payment is worth today. SEBI uses it as its yardstick for interest-rate risk, the risk that shifting rates change what the bonds are worth. Longer durations get higher risk scores. Our ultra short duration page explains the idea step by step.

SEBI's name for this category has been Short Term Fund since February 2026. Its rule says "the scheme name shall be the same as the scheme category", which is why fund names now carry those words. Fund houses had until 26 August 2026 to rename their schemes.

The band is about duration only. SEBI sets no minimum credit rating here; the fund's PRC cell, explained below, shows the most credit risk it may take. Wider debt fund rules still bind it. A tenth or more of net assets, everything the fund is worth, must be cash, government securities, treasury bills or repo on government securities. Any single sector may take at most 20%, though a few holdings, bank certificates of deposit among them, sit outside that count.

You may sell your units back at any time. There is no lock-in, a stretch when selling is not allowed.

The interest-rate part of the risk score steps up. Duration over 1 and up to 2 years scores 3 out of 6; over 2 and up to 3 years scores 4. Funds with a duration up to a year score 1 or 2.

Those scores feed the riskometer, SEBI's compulsory risk label. Its six levels run from Low to Very High, and it is re-checked monthly. SEBI rates a debt portfolio as a whole on three risks:

• credit risk, the chance a borrower pays late or not at all;
• interest-rate risk, read from the portfolio's duration;
• liquidity risk, the chance a holding cannot be sold quickly at a fair price.

It averages the three and maps the result to a level.

Most listed short duration funds read Moderate on 29 September 2026; the rest read Low to Moderate.

SEBI's investor website states the basic link: when interest rates rise, bond prices may fall, and vice versa. Your units gain or lose value along with the bonds underneath them. Valuation agencies supply a market price for every holding, so the price of one unit, the NAV, can change every day.

If a fund's level changes, you must be told by email or SMS. Koshex keeps reviewing your holdings over time and flags changes, for example a shift in a fund's risk level or category.

A short duration fund can sit in row II or row III of SEBI's Potential Risk Class (PRC) grid. Every debt fund is placed in one of its nine cells, three rows by three columns.

The rows cap interest-rate risk, measured by the fund's Macaulay duration:

• Class I: up to 1 year
• Class II: up to 3 years
• Class III: any duration

This category's band ends at 3 years. That matches row II's ceiling and runs past row I's. So the band allows row II or row III, and the fund house chooses the cell.

The row also limits each holding. In Class II, no holding may have more than 7 years left to maturity, though central and state government securities are exempt. Class III has no cap.

The columns cap credit risk, using a credit risk value (CRV) for each holding. A rating is an agency's view of how likely a borrower is to pay on time; AAA marks the highest degree of safety. It is a view, not a promise, and it can change. Government securities, repo on them and cash score 13. AAA scores 12, AA+ 11 and AA 10, stepping down to 1 below investment grade. The fund's figure is the size-weighted average, so higher means less credit risk:

• Column A: a CRV of at least 12
• Column B: at least 10
• Column C: anything under 10

The cell is a ceiling, and a fund is free to stay below it. On the application form and the two main scheme documents, the cell sits near the scheme's name, "prominently visible and in bold". Adverts must show it prominently too.

Moving to a riskier cell is a fundamental attribute change, a change to one of the scheme's basic features. Each investor must be told in writing, where email or SMS counts. You may then leave at the day's NAV with no exit load, the fee some funds charge for selling within a set time.

Corporate bond and banking and PSU funds are defined by who they lend to and how that debt is rated. A short duration fund is defined by its duration band alone.

• Corporate bond funds must put at least 80% into company bonds rated AA+ and above.
• Banking and PSU funds must put at least 80% into debt of banks, public sector undertakings (government-owned companies), public financial institutions and municipal bonds. SEBI's name for them is now Banking and PSU Debt Fund.

For both, the 80% is measured after the 10% that must sit in liquid assets. In SEBI's own example, that works out at 72% of the whole fund.

On 29 September 2026, most listed corporate bond funds read Moderate and the rest Low to Moderate. Banking and PSU funds showed the same pattern. For both, Koshex suggests 1 to 3 years or more, as our own guide rather than a SEBI rule.

One step shorter is the low duration fund, which SEBI now calls Ultra Short to Short Term Fund. Its portfolio duration must stay between 6 and 12 months, and on that date most listed ones showed Low to Moderate.

Yes. For units bought from 1 April 2023 onwards, the gain is charged at your slab rate, meaning your normal income-tax rate, however long you hold. The three-year line many people remember no longer decides anything for those units.

The Income-tax Act, 2025 has this in section 76. It covers any Specified Mutual Fund, one with over 65% in debt and money market instruments, and this category qualifies.

For older units, how long you have held them, the holding period, still matters. Pre-April 2023 units sold within 24 months of purchase count as a short-term capital gain, again at slab rate. Kept longer, they give a long-term capital gain, charged 12.5% without indexation: no inflation uplift to what you paid.

An assumed example, not a forecast: two lots of the same fund each show a gain of ₹46,000 when sold in September 2026. Add 4% cess on top of the tax. No surcharge is assumed; that extra charge on the tax starts once total income passes ₹50 lakh.

• February 2023 lot, held over 24 months: 12.5% is ₹5,750, plus ₹230 cess, so ₹5,980.
• May 2023 lot, if the whole gain falls in your 20% slab: ₹9,200 plus ₹368 cess, so ₹9,568.
• Same May lot, in a 30% slab: ₹13,800 plus ₹552 cess, so ₹14,352.

Both lots were held for more than three years. Only the purchase date split them.

Switching counts as a sale. Move pre-April 2023 units into another debt fund and the new units start from the switch date, so they fall under the slab-rate rule.

A resident who redeems faces no TDS, tax deducted before the money reaches you. IDCW, a payout from the fund's income or gains that lowers the NAV by the amount paid, is taxed at slab rate. Once IDCW from a single fund house tops ₹10,000 within a tax year, it withholds 10% TDS on all of it. That TDS is credited against the year's tax bill.

Koshex suggests this category for money you plan to use in one to three years. Money set aside for a home renovation planned two years out is one example. This is Koshex's view, not a SEBI requirement.

For money needed inside a year, the shorter bands fit the timeline more closely. Low duration and ultra short duration funds keep their portfolio duration at a year or less.

Same-day instant access exists only in overnight and liquid schemes. Here, payment can take up to 3 working days, so leave a little room before the date.

Koshex is an AMFI-registered distributor (ARN-154632), a registered intermediary that helps you buy and manage funds. We offer regular plans, the version of a fund bought through a distributor. We help you choose a fund that suits your goal and timeline, and we keep reviewing what you hold.

Start with the 3-year and 5-year returns, then set each fund's risk, fee and size beside them. There are 25 listed short duration funds. Only the top 10 appear in the table, sorted by the ranking you choose. 23 of them are at least three years old, and only those are ranked on 3-year return and counted in the averages.

• CAGR means the yearly growth rate, averaged as though the fund grew by the same rate each year. Compare a fund's record with the category's 3-year average of 6.1% and 5-year average of 6.4%. Both are simple averages over funds with a 3-year record, and both look backwards.
• Riskometer and PRC cell. Two funds with similar returns may sit on different levels or cells.
• Expense ratio is the yearly fee, a share of your money deducted from the fund.
• AUM, assets under management, is the current value of everything a fund holds. The listed funds hold ₹1,06,222 Cr in total.

Factsheets usually show a fund's Macaulay duration, which tells you where in the 1-to-3-year band it sits. They also show its yield to maturity (YTM), the return the bonds would give if held to maturity at today's prices.

A few index funds tracking short-term debt indices appear in the list too; they follow their index, not this band.

No SEBI rule fixes an exit load here. Any load is each scheme's own choice, written into its scheme document, and many have none.

A lumpsum puts in one larger amount at once; a SIP invests the same amount on a fixed schedule, often monthly. Each SIP instalment is its own lot with its own purchase date, taxed at slab rate.