The Best Low Duration Debt Funds in India of 2025 - Guide
Low duration debt funds have received a lot of attraction among those investors who want a balance between returns and low risk. These debt funds can be considered the best choice in 2025 when the Indian financial environment is changing and the individual tends to have a higher liquidity and moderate risk; this is why they are popular among the short-term investment purposes.
What is Low Duration Debt Funds and Who Do You Invest?
Low duration debt fund invest in debts and money market products like corporate bonds, government securities and commercial papers whose Macaulay duration lies between 6 and 12 months. These funds are designed to provide stability and less susceptible to interest rate changes and thus are more stable than ultra-short-term funds, liquid funds and less volatile than long-term debt funds.
These funds are suitable for:
- Investors who are looking better returns than savings account and fixed deposit.
- Individuals having a short term investment period of 6-18 months.
- Individuals who want relatively low risk of interest rates and medium returns.
Key Features or Highlights
- Investment in high quality and short term debt.
- Average credit risk, insensitive interest rate.
- Good to park excess money in the short term.
- Tend to be more tax efficient than FDs to individuals in the higher tax bracket.
Did You Know?
The recent AMFI data shows that low duration debt funds recorded 24 percent upsurge in inflows in early 2025, as investors focus on shorter-term debt more than equity or long term bonds, which are volatile.
What is the reason why low duration debt funds are more preferred in 2025?
Interest rates have been fluctuating in the current financial year as the reserve bank of India maintains a cautious attitude. Less sensitive to sharp fluctuations in interest rates, especially in the low-duration range of investments, debt mutual funds provide a safety net in the turbulent period. This is what makes their net asset value (NAV) quite stable in comparison with longer term debt funds or even equity funds.
Pros
- Increased risk adjusted returns in turbulent periods.
- Best when its use is urgent or at short notice.
- Reduced exit loads and enhanced post-tax returns of individuals who are in higher tax brackets.
Cons
- The returns would not be guaranteed and can change based on the changes in the market and interest rate.
- It has been exposed to credit risk to some extent, based on the underlying portfolio.
People Also Ask
What is the major distinction between low duration debt funds and liquid funds?
Low duration funds have an extended average maturity and a marginal higher yield potential than liquid funds, which tend to invest in instruments with a maturity of less than 91 days.
What Are Low Duration Debt Funds and How do they operate in India?
The fund managers invest the funds collected to several short term debt instruments with an average of 6-12 years. The portfolio usually incorporates commercial papers, treasury bills and the non-convertible debentures with high credit ratings. The performance is determined by the aspects such as credit quality, changes in the interest rate and the general liquidity in the market.
Key Points
- The quality of the portfolio is important - AAA, AA rated papers.
- Most of the returns are in the form of regular interest income.
- NAV is not very volatile because of short maturity.
Did You Know?
SEBI norms have guaranteed greater portfolio disclosure in 2025 where investors can easily assess risk due to the daily publication of portfolio disclosure.
The Best Low Duration Debt Funds of 2025
The overall best low duration debt funds would be based on the past performance, the current yield to maturity (YTM), the expense ratios and the quality of the portfolio. The best performing funds that are considered to be in 2025 include:
| Name of the Fund | 2025 AUM (in crore) | One year Return (%) | Adjusted Duration (months) | Expense Ratio (%) |
|---|---|---|---|---|
| HDFC Low Duration Fund | 9,500 | 7.2 | 10.4 | 0.60 |
| SBI Magnum Low Duration | 7,800 | 6.7 | 9.8 | 0.65 |
| Kotak Low Duration Fund | 6,200 | 7.0 | 11.0 | 0.55 |
| Axis Low Duration Fund | 5,000 | 6.8 | 9.6 | 0.50 |
| ICICI Pru Low Duration | 10,400 | 7.3 | 10.2 | 0.48 |
Key Features or Highlights
- Widely diversified investments.
- High liquidity- easy entry and exit.
- Stable better than average performance.
People Also Ask
Which low duration debt fund is the right one to select in 2025?
Assess portfolio quality, consistency of the historical returns, low expense ratio, experience of fund manager and assets under management.
What are the Tax Implications of low duration debt funds?
Each of capital gains, including mutual funds, less than 35 percent of which is allocated to equity, will be subject to tax after the reformed tax regulations in April 2023, regardless of the time of holding. Previously, there was indexation of long-term capital gains (after 3 years). Only capital gains treatment on short-term now is permitted.
Pros
- In the case of the people who are lower tax bracket, tax incidence is as usual.
- These can be used to manage liquidity by the trusts and corporates.
Cons
- None of the indexation advantages in the long term; could affect high-income investors.
- Efficiency on taxes has become lower than years before.
Did You Know?
Even fewer funds in 2025 are providing direct plans that have even lower expense ratios, which is better to do-it-yourself investors.
What are the Key risks of Low Duration Debt Funds?
Although these funds are considered to be safe and short term, their risks are:
- Credit risk - chance of default or downgrade of the instruments within the portfolio.
- Interest rate risk - though very minimal because of low duration, unexpected increases in the interest rates may have a temporary impact on NAV.
- Liquidity risk - during stressful periods it may be hard to sell debt papers and thus, there may be delays in redemption.
User Intent Satisfied?
Yes, you will know the specifics of why these funds will be useful in 2025, what their characteristics, selection criteria, and the risks implied are.
Key Points
- Always verify the quality of credit which is easily displayed through routine disclosures.
- Do not pursue the high yielding but less rated portfolios.
People Also Ask
Should the investment in low duration debt funds be considered risky in 2025?
These are investment funds with moderate credit risk but which are normally less risky than investments of credit risk but there is still some risk particularly in unpredictable macroeconomic markets.
What Are the Differences between Low Duration Debt Funds and other Short-term Alternatives?
How are the low duration debt funds performing compared to the other short-term vehicles:
| Investment Alternative | Annual Return (2025) | Liquidity | Taxation of the Alternative | Riskiness |
|---|---|---|---|---|
| Low Duration Debt Fund | 6.7 percent | T+1 redemption | Slab rate, no indexation | Low to Moderate |
| Liquid Fund | 6.1 percent | Almost instant | Slab rate, no indexation | Low |
| Fixed Deposits (1 year) | 6.5 percent | Premature penalty | Interest taxable as per slab | Low |
| Savings Account | 3.0 percent on demand | Interest taxed as per slab | Very low |
Key Features or Highlights
- The low duration funds will be able to outperform FDs and Savings account, particularly 6-18 months.
- A little more risky than fixed deposits, though, more returns are possible.
- The disparities in taxation have reduced with post 2023 tax changes.
Did You Know?
Low duration funds are now being used by a lot of corporate treasuries in India to park their operational funds as a result of flexibility, higher returns and professional risk management.
Before investing, what should investors take into consideration?
In order to choose the most suitable low duration debt fund to suit you, always:
- Look into the quality of underlying portfolio - at least 80 percent in AAA and government actions.
- Examine the expenses ratio since low expenses imply high returns in the long-term.
- Evaluate size of fund and fund manager record.
Other Factors
- You would prefer low exit loads in the case of frequent liquidity.
- Compare at least 3-years historical rolling returns.
People Also Ask
What is the optimum duration of the investment of low duration debt funds?
As a rule, it is best used on an investment range of 6 to 12 months to ensure the interest rate risk is minimised and the yield is maximized.
Notice To You How Can You Invest in Low Duration Debt Funds in 2025?
The investment is very easy with the emergence of fintech applications and direct mutual fund platforms. You can invest:
- Through a mutual fund house or an AMC over the internet (Low cost ratio)
- Using online aggregator applications (easy compare schemes).
- Offline distributors (to serve them personally)
One should consider the Direct Plan and its reduced charges and superior long-term returns.
Did You Know?
Indian investors have embraced digital usage in their investments, evidenced by the rate of over 65 percent of all debt fund SIP registrations being done online in the year 2025.
TLDR or Quick Recap
- Short-term investments Low duration debt funds are appropriate to invest in short-term projects with an average of 6 to 12 months.
- Pay superior returns as compared to savings, and tend to outperform short FDs.
- Bear moderate credit and interest rate risk and less than other debt funds.
- Tax is paid based on individual income slab.
- Perfect in parking excess cash or in handling short term cash requirements.
- Select high quality credit funds, low expense ratio funds, and restrictive performance funds.
People also Ask - Frequently Asked Questions
Q1. Is it possible to lose money in low duration debt funds?
A. These are quite secure, but can be affected by losses in the event that the fund has low-rated papers that default or increases the interest rates drastically within a short foray.
Q2. What is the safest low term debt fund in 2025?
A. Find funds that have high allocation to sovereign or AAA-rated bonds, low allocation to the private NBFCs, and record.
Q3. Should low duration debt funds be used as a lump sum or SIP investment?
A. Both yet SIP investment aids in timing risk reduction. Lump sum would be appropriate in case you possess large surplus on short term.
Q4. Is there any lock-in period of low duration of debt funds?
A. No lock-in, but can contain very low exit load (in case of very early redemption) (typically up to 1 month).
Q5. Do investments made in low duration debt funds attract taxation?
A. Yes, it means that all the gains will be subject to tax as per your respective income tax slab rate with no indexation benefit after April 2023 of both STCG and LTCG.
Sources
- AMFI India - Debt Funds Flow 2025
- SEBI Mutual Fund Norms
- Morningstar India - Best Low Duration Funds Return 2025
