How are low duration funds essential for your portfolio?

When you invest money in mutual funds, you need to invest in both equity and debt funds. Equity funds are riskier but give higher returns, whereas debt mutual funds are less risky, but the returns are low. A good balance between both types of funds is essential for your safety. A thumb rule is to invest (100 – your age)% of your money in equity with the rest of the money in debt funds.

If you are 25, you can invest 75% of your money in equity with the rest in debt. As you grow older, you can reduce your equity investment and invest more in debt funds for safety. Debt funds are essential for your portfolio. In debt funds, there are low duration funds, which is a good option to include in your portfolio.

What is a low duration fund?

A low duration fund is a short-term fund where you invest money for a very short period. These are debt type of funds with lower risk. They are meant to help you achieve your short-term goals. If you have money with you that you may need after three months or so, you may keep it in the bank. You will not earn much interest on it. Instead, you can invest in a low duration fund.

This is an ultra-short duration fund where the maturity of the fund is around three months to six months. This is a low risk fund allowing you to earn interest on your money, which will be more than what you get from a savings bank account. It is a liquid fund. If you need money urgently, you can get it easily by selling your investment in the fund.

How does it work?

A low duration fund invests money in debt as well as in money market securities. These are investments made in treasury bills and commercial papers, which are relatively less risky. The interest earned on such low duration funds would be lesser than that of regular mutual funds. However, it is higher than that of the bank interest rate. The best part about this investment is you can keep a sum of money invested in a safe option for a short period of time and earn returns on it.

This is how you can invest in such funds:

• Look for the best low duration fund. Check out the returns of the funds and the rating of funds on various websites.
• On average, you can expect an annualized return of more than 7% on such low duration funds.
• Invest in a fund where the risk is low or moderate.
• Once you invest money, you can exit any time by selling the fund. You will get the money as per the NAV (net asset value of the fund).

Because of their quick liquidity and decent returns, low duration funds can be a part of your portfolio.