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As the name suggests, short-duration mutual funds are a great investment choice for investors who are seeking profitable returns in a shorter duration. Along with this, these short-duration mutual funds offer balanced risk, liquidity, and stability. Short duration mutual funds allocate their assets to instruments like treasury bills, commercial papers, and certificates of deposit to maintain liquidity. They also invest in corporate bonds, government securities, and similar fixed-income assets that mature within 1 to 3 years, aiming to offer a balanced mix of risk and return.
As of June 2025, short-term interest rates are still high, presenting a favorable opportunity to invest in high-quality short-duration funds. In this blog, we’ll break down the concept of short duration mutual funds, explore why they could be a smart addition to your 2025 portfolio, and highlight a selection of top-performing funds worth considering this June.
What are Short Duration Mutual Funds?
Short duration mutual funds fall under the debt mutual fund category and invest in fixed-income instruments like bonds, treasury bills, commercial papers (CPs), and certificates of deposit (CDs). These funds focus on securities with a maturity range of 1 to 3 years, aiming to offer consistent returns while keeping interest rate risk relatively low.
Overview of Short Duration Mutual Funds
| Aspect | Details |
| Ideal Investment Tenure | Typically suited for a period of 1 to 3 years. |
| Investment Mix | Includes corporate bonds, government securities, and various money market instruments. |
| Risk Exposure | Moderate risk level involving both credit and interest rate risks. |
| Expected Returns | Generally delivers better returns than liquid or ultra-short funds, but lower than long-duration debt funds. |
| Tax Implications | Short-term gains (held under 3 years) are taxed as per your income slab; long-term gains (over 3 years) get indexation benefits. |
Features of Short Duration Mutual Funds
| Feature | Description |
| Investment Duration | Suitable for financial objectives with a 1 to 3-year time frame. |
| Asset Allocation | Invests in fixed-income instruments like treasury bills, commercial papers, certificates of deposit, corporate bonds, and government securities. |
| Risk Factor | Carries relatively low risk—safer than equity funds but riskier than liquid or overnight funds. |
| Return Consistency | Offers more predictable and stable returns compared to equities; usually performs better than liquid or ultra-short-term debt funds. |
| Sensitivity to Interest Rates | Less impacted by interest rate changes than long-maturity debt funds. |
| Redeemability | Allows easy and quick access to funds with high liquidity. |
| Tax Treatment | Investments held beyond 3 years qualify for long-term capital gains tax with indexation benefits. |
Best Short Duration Mutual Funds to Consider in June 2025
| Fund Name | 1-Year Return | 3-Year CAGR | Expense Ratio | AUM (₹ Cr) |
| HDFC Short Term Debt Fund | 7.4% | 6.8% | 0.50% | ₹15,000+ |
| ICICI Prudential Short Term Fund | 7.2% | 6.6% | 0.45% | ₹12,500+ |
| Kotak Short Term Fund | 7.1% | 6.5% | 0.42% | ₹9,800+ |
| SBI Short Term Debt Fund | 7.0% | 6.3% | 0.39% | ₹11,200+ |
| Axis Short Term Fund | 6.8% | 6.2% | 0.48% | ₹7,900+ |
History and Overview of HDFC Short term Fund
- Launch Date: The fund was introduced on June 25, 2010, and was initially known as the HDFC Short Term Opportunities Fund.
- Objective: Its primary goal is to deliver regular income by investing in debt and money market instruments that typically have maturities of up to 36 months.
- Benchmark Index: The fund is benchmarked against the CRISIL Short Duration Debt A-II Index, which serves as a standard for measuring performance in the short-duration debt category.
- Fund Management: The fund has been managed by Anil Bamboli since its inception. The direct plan is occasionally co-managed by Dhruv Muchhal.
- Risk Classification: It is categorized as a moderately low-risk debt fund, making it suitable for investors seeking relative stability with short- to medium-term horizons.
| Parameter | Details |
| Assets Under Management (AUM) | ₹15,000 – ₹17,000 crore |
| Return Since Launch (CAGR) | Approximately 8.1% – 8.2% annually |
| 2024 Return | Around 8.3% |
| 2023 Return | Around 7.1% |
| Effective Maturity | Approximately 4.2 years |
| Modified Duration | Roughly 2.8 – 2.84 years |
| Expense Ratio | Around 0.7% – 0.74% (Direct Plan: ~0.4%) |
History and Overview of ICICI Prudential Short Term Fund
- Inception Date: The fund was launched on October 25, 2001, as an open-ended short-duration debt scheme.
- Fund Management: It has been managed by Manish Banthia since November 2009, with Nikhil Kabra joining as co-manager from December 2020.
Key Fund Details
| Attribute | Description |
| Benchmark | Follows the NIFTY Short Duration Debt Total Return Index and also draws comparison with CRISIL Short-Term Bond indices. |
| Risk Level | Categorized as a moderately risky debt fund based on SEBI’s riskometer. |
| Expense Ratio | Approximately 1.04% for the regular plan and around 0.45% for the direct plan. |
| Assets Under Management (AUM) | Around ₹21,200 to ₹21,300crore as of May–June 2025. |
| Minimum Investment | Starts at ₹5,000 for lump sum and ₹1,000 for SIP; no lock-in period or exit load. |
Performance & Portfolio Snapshot
| Performance Metric | Data |
| Since Inception CAGR | Roughly 7.9% per annum |
| 1-Year Return | Approximately 9.0% |
| 3-Year Return | Around 8.1% |
| 5-Year Return | Close to 6.6% |
| Portfolio Mix | ~54% corporate debt, ~36% government securities, ~10% in cash & equivalents |
| Top Holdings | Major allocations include GoI Bonds (7.10% 2034, 7.81% 2033), LIC Housing Finance, and NABARD debt instruments. |
| Turnover Ratio | Around 94%, reflecting active portfolio management. |
History and Overview of Kotak Short Term Fund
Launch Date: Introduced on May 2, 2002, as an open-ended debt fund focused on securities with maturities ranging from 1 to 3 years.
Fund Management: Managed by Deepak Agrawal and Abhishek Bisen.
Objective: Aims to deliver stable returns with high liquidity by investing in a diversified mix of debt instruments—such as bonds and government securities—and money market tools like Treasury Bills, Commercial Papers, Certificates of Deposit, and repos, thereby spreading issuer risk.
Benchmark: Measures its performance against the NIFTY Short Duration Debt Index and is also evaluated using CRISIL’s short duration bond indices.
Assets Under Management (AUM): Stands at around ₹17,500 to ₹17,800 crore for the April–June 2025 quarter.
Expense Ratio – The expense ratio is around 1.17% for the regular plan, while it starts as low as 0.38% for the direct plan.
| Time Frame | Kotak Fund CAGR | Benchmark/Category Average |
| Since Inception | Approx. 7.4% p.a. | — |
| 1 Year | Around 9.7% | About 8.9% (Benchmark Index) |
| 3 Years | Nearly 8.25% | Roughly 8.19% (Category Average) |
| 5 Years | Approximately 6.74% | Close to 7.01% (Category Average) |
History and Overview of SBI Short Term Fund
Launch Date: Launched on July 27, 2007, as an open-ended debt scheme focused on short-duration investments.
Fund Manager: Managed by Mansi Sajeja, a CFA and PGDBM, who took charge of the fund on December 1, 2023.
Fund Details
| Attribute | Details |
| Benchmark Index | CRISIL Short Duration Debt A-II Index |
| Risk Rating | Classified as Low to Moderate risk |
| Assets Under Management (AUM) | Estimated at ₹14,700 crore (range: ₹14,528–₹14,733 crore) as of May–June 2025 |
| Expense Ratio | Roughly 0.85% |
| Minimum Investment | ₹5,000 for lump sum; ₹500 to ₹1,000 for SIP |
Performance and Portfolio Composition
| Metric | Value / Summary |
| CAGR Since Inception | Approximately 7.4% to 7.5% per annum |
| 1-Year Return | Around 9.1% for Regular Plan, ~9.7% for Direct Plan |
| 3-Year Return | Ranges between 7.5% and 8.0% |
| 5-Year Return | Between 6.1% and 6.4% |
| Asset Allocation | Roughly 61–62% in corporate bonds, 33–36% in government securities, 5–10% in cash or equivalents |
| Credit Profile | Strong quality: ~87% in AAA-rated instruments, ~13% in AA-rated securities |
| Portfolio Turnover | Around 109% annually, indicating an actively managed strategy |
History and Overview of Axis Short Term Fund
Investment Objective: Seeks to provide steady returns and ensure liquidity by investing in a well-diversified mix of debt and money market instruments, with a focus on managing credit and interest rate risks at moderate levels.
Benchmark: The fund follows the NIFTY Short Duration Debt Index A-II for performance comparison.
Performance and Portfolio Composition
| Metric | Value |
| AUM (Apr–Jun 2025) | Approximately ₹9,300 to ₹9,640 crore |
| Average Residual Maturity | Around 3.6 to 3.8 years |
| Modified Duration | Close to 2.8 years |
| Macaulay Duration | Nearly 2.9 years |
| Yield to Maturity (YTM) | Estimated between 7.48% and 7.52% |
| Expense Ratio | Ranges from 0.88% to 0.92% |
| Risk Classification | Marked as Moderate |
Performance Trends:
- CAGR Since Inception: Approximately 7.5% to 7.6%
- Recent Annual Returns:
- 2024: Around 8%
- 2023: About 6.8%
- 1-Year Return (mid-2025): Nearly 9.6%, marginally outperforming the category average
Why Consider Short Duration Mutual Funds in 2025?
1. Better Yields Than Liquid Funds: With stable interest rates, short-duration funds are delivering higher returns compared to liquid or ultra-short-term funds.
2. Reduced Interest Rate Sensitivity: These funds are less affected by rate fluctuations than long-term debt funds, offering more stability during uncertain market conditions.
3. Tax Advantages: For those in higher tax slabs, holding these funds for over 3 years allows indexation benefits, potentially resulting in higher post-tax gains than fixed deposits.
4. Diversified Portfolio: Typically, these funds invest across corporate bonds, government securities, and money market instruments, helping to spread and reduce credit risk.
5. Ideal for 1–3 Year Plans: Perfect for meeting short- to medium-term financial needs such as funding a vacation, purchasing a vehicle, or building an emergency fund.
6. Expertly Managed: Handled by skilled fund managers who actively track market trends, interest rates, and credit profiles to balance risk and enhance returns.
7. Flexible Withdrawals: These funds generally allow hassle-free redemptions with low or no exit charges after a brief holding period, offering more flexibility than fixed deposits.
Advantages of Investing in Short Duration Mutual Funds
1. Higher Returns Compared to FDs or Savings Accounts
Short-duration funds often outperform traditional deposits, particularly when interest rates are on the rise.
2. Reduced Sensitivity to Interest Rate Changes
With shorter average maturities, these funds are less affected by interest rate volatility than long-duration debt options.
3. Suited for 1–3 Year Investment Goals
A great choice for investors seeking moderate growth and stability over a short to medium time frame.
4. Portfolio Diversification
These funds invest in a balanced mix of government securities and high-quality corporate bonds, helping improve overall risk-return efficiency.
Drawbacks of Short Duration Mutual Funds
1. Credit Risk Exposure
Certain funds may include lower-rated debt to enhance returns, which can increase the risk of defaults or credit downgrades.
2. Market-Linked Fluctuations
Unlike fixed deposits, these funds are subject to market movements and can experience variations in Net Asset Value (NAV).
3. Less Tax-Efficient for Short Holding Periods
If held for less than three years, capital gains are taxed as regular income based on your tax slab, reducing post-tax returns.
Who should consider investing in short-duration mutual funds?
1. Investors with a low to moderate risk appetite: Suitable for those who prefer stability over high returns but are open to taking limited market-related risks for potentially better gains than traditional savings options.
2. Investor with short to medium-term financial objectives: Ideal for individuals planning to achieve specific goals within a 1 to 3-year timeframe, such as buying a car, funding a vacation, or building an emergency corpus.
3. FD-Plus Returns with Mild Volatility – Investors looking for higher returns than fixed deposits, while being comfortable with minor NAV fluctuations.
4. Diversified Debt Portfolio Exposure – Anyone wanting to diversify their debt investments with a balanced mix of instruments
Final Thoughts
If you’re aiming for a balanced mix of returns, risk, and liquidity in 2025, short-duration mutual funds present a strong investment option. Though they carry some level of risk, their carefully chosen portfolios and shorter maturity profiles make them a reliable pick during times of interest rate uncertainty.
