Ultra-short and low-duration funds

Just beyond liquid funds sit a group of debt categories that hold slightly longer-dated instruments: ultra-short duration and low duration funds. They are still short-term in nature, but each carries a touch more duration than a liquid fund, and with it a touch more sensitivity to interest rates.

Why a little more duration matters

Recall that duration is how long a bond has left to run, and that longer duration means a bigger price move for a given change in rates. These categories hold paper maturing over somewhat longer periods than a liquid fund does, so their values can move a little more when rates shift. It is still modest compared with a long-bond fund — but it is more than a liquid fund, which is the whole distinction.

Ultra-short versus low duration

The two names describe slightly different bands of that short horizon: ultra-short duration funds sit just above liquid funds, and low duration funds a little further out again. The exact ranges are defined by category rules, but the idea is simply a short ladder — each rung a bit longer in horizon, and a bit more sensitive to rates, than the one below.

Money market funds

A close cousin in this short part of the spectrum is the money market fund, which is defined by the type of instrument it holds rather than by a duration band. It has its own page: money market funds.

What they are used for

These funds tend to be used for money with a horizon of a few months to around a year — longer than you would leave in a liquid fund, but still short. That is a description of where the category sits, not a suggestion about your own money, which depends on your horizon and needs. A short-duration debt scheme is also a common source scheme in a systematic transfer plan, where a lump sum waits and moves into another scheme in fixed amounts; the STP calculator illustrates the mechanics.

Still not free of risk

A little more duration means a little more that can move against you, and these funds carry credit risk on what they hold just as any debt fund does. Their value is not fixed and can fall. They are low on the volatility scale, not off it — the same “steadier is not safe” point that runs through the whole debt category.