Short Duration Mutual Funds: Good For Capital Gains?

Debt funds are a type of mutual fund that proves to be a suitable investment choice for individuals looking for lower risk compared to equity funds. These funds are categorized into various types based on their investment strategies, issuer companies, and duration.  

Under the category of duration debt funds, they are classified as ultra-short-term funds, short duration funds, medium-duration funds, and long-duration funds along with others. Each of these types has its own investment objectives and risk profile. 

In this blog today, we’re going to cover short duration mutual funds and how they’re good for capital gains. So, let’s get into it!

What Are Short Duration Debt Mutual Funds?

Short Duration Mutual Funds are a type of debt mutual funds that invest in securities with shorter maturity durations. According to the Securities and Exchange Board of India (SEBI), if the Macaulay duration of the mutual fund scheme ranges from one to three years, then those debt funds are classified as Short Duration Funds. 

Macaulay duration measures the risk associated with the change in the values of the investment due to interest rate movements in the market. Investors often go for short duration mutual funds as a way to manage interest rate risk, as these funds are less sensitive to changes in interest rates. Since the duration of these short duration mutual funds itself ranges from one to three years, the interest rate risk also causes severe losses. 

In this way, short duration mutual funds offer higher comparative returns than traditional savings accounts and prove great for capital gains.

Are Short Duration Mutual Funds Good For Capital Gains?

Depending on various factors such as interest rate movements and the fund’s investment strategy, short duration mutual funds can be considered good for capital gains.  

Short duration mutual funds are less sensitive to changes in interest rates because they hold securities with shorter maturities. Being less sensitive to interest rate fluctuations, they help in preserving capital gains. 

Short duration funds allow flexibility in the adjustment of the portfolio’s duration. This enhances returns in response to market conditions. Furthermore, Investment in short duration mutual funds provides you with a broader domain for investment. This spread of investments across various fixed-income securities reduces the overall risk and enhances capital gains.

Therefore, you can say that short duration debt funds can prove good for capital gains. However, it is also essential to keep in mind that short duration mutual funds, like all investments, carry certain risks and therefore, should be approached critically.

The Bottom Line

The bottom line is short duration funds emerge offering a middle ground between the stability of funds and the potential for higher yields than opinions like FDs. These investments associated with fixed-income securities having shorter maturities provide investors with a way to navigate uncertain market conditions.

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