Best short duration mutual funds to invest in 2022

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Mutual fund managers and advisors have been asking conservative investors to choose short duration debt funds for a while. According to these experts, short duration funds are ideal to tide over the uncertainties on interest rate hikes. Most money market participants are expecting RBI to hike policy rates in the coming months.

According to the Sebi mandate, short duration funds can invest in debt instruments with maturity between one and three years. That means these schemes are meant for short term investments of one to three years. They are somewhat in the middle when it comes to interest rate risk. They are riskier than liquid, ultra short term, and low duration funds. However, they have lower risk compared to medium duration and long term funds.

These schemes invest in both short term bonds and very short term investments. They invest in treasury bills, commercial papers, certificates of deposits and so on to take care of their liquidity needs. They also invest in corporate bonds, government securities, etc.

A rate hike is always bad news for debt mutual funds. However, short duration funds fare better than long term bonds. When interest rates go up, NAV of debt funds come down. This is because of the inverse relationship between yield and prices. So it make sense to invest in these schemes in a rising rate scenario.

In short, if you are looking for debt schemes to invest for one to three years with not much volatility, you may check out short duration funds. However, make sure to choose schemes that do not take extra risk for extra returns. Safety should be your prime concern when it comes to debt investments.

Best short duration funds

Methodology: has employed the following parameters for shortlisting the debt mutual fund schemes.

1. Mean rolling returns: Rolled daily for the last three years.

2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.

ii)When H <0.5, the series is said to be mean reverting.

iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.

X =Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

Downside risk = Square root of Z

4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.

Asset size: For debt funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)

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