What is a short-duration debt mutual fund? Definition, benefits and taxation rules

debt mutual funds


Debt funds are a mutual fund investment avenue that offer satisfactory returns through their interest payments on fixed-income securities and bonds. Investing in debt mutual funds is a strategy for many retail investors who look for predictable returns on their short-term ainvestments with minimum possible risks. Such funds are not only less risky but even maintain a negative correlation with equity funds. To place it in simple words, the risk associated with debt mutual funds is comparatively lower than equity mutual funds.

Debt funds are of different types such as overnight funds, liquid funds, ultra-short duration funds, low-duration funds, money-market funds and others. Each has its own set of advantages, risks, features and investment durations. One such preferred type of debt mutual fund is short-duration debt funds. These funds are prudent for meeting your emergency fund requirements and various short-term goals such as vacationing abroad, funding your car’s down payment, revamping your home, etc.

Read on to understand the definition of short-duration debt mutual funds along with their benefits and tax implications.

What are short-duration debt funds?

Short-duration debt mutual funds primarily invest in securities with shorter maturities or duration. These debt funds invest in debt instruments such as government securities, treasury bills and other money market and debt instruments with a maturity of between one and three years.

What are the advantages of short-duration debt funds?


Debt funds can help you reduce the overall risk exposure to your investment portfolio. In simpler terms, investing a part of your investible in debt mutual funds allows you to earn stable returns, which make up for the negative returns generated by your equity investments during market downturns.

Satisfactory returns

Short-duration debt mutual funds focus on securities with shorter maturities, but they still offer an opportunity to earn higher returns than savings accounts, fixed deposits, recurring deposits and other traditional fixed-income products. They generate higher returns than their traditional counterparts owing to their association with the market.

High flexibility

Shorter maturity time frames of such debt mutual funds allow you to move your funds to distinct investments more frequently. This feature assists you to leverage market volatilities and accordingly adjust your investment strategies.

High liquidity

Short-duration debt funds typically maintain a portion of their investment portfolio in highly liquid instruments such as treasury bills and cash equivalents. This liquidity permits you to liquidate your investments quickly to meet your short-term life goals.

Taxation rules of short-duration debt funds

Until 31st March 2023, short-duration debt mutual funds were taxed as per the holding period and tax bracket of the investor. However, as of 1st April 2023, there has been a significant change in the debt fund taxation rules.

As per the new rules, any capital gains from debt funds’ redemption on or after 1st April 2023 will be taxed as the investor’s tax slab. Thus, now holding a debt fund for the long-term horizon will no longer provide you long-term tax benefits.


Owing to their low-risk profile, potential to generate satisfactory returns, diversification and high liquidity features, short-duration debt mutual funds serve as a valuable addition to your investment portfolio.

You can easily invest in such funds through SIP (systematic investment plan) to add discipline and consistency to your investment strategy and plan. Just make sure to use an online mutual fund SIP calculator to compare distinct SIP plans based on variables like their expected returns, performance, fund manager, fund house, etc. This way, you can find an appropriate short-duration debt mutual fund scheme that aligns with your financial goals, budget, and risk appetite


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