Indian debt market participants are eyeing the December 2025 policy meeting for a possible rate cut, given the favourable CPI inflation backdrop and signs of cooling economic growth. Following this move, the Reserve Bank of India is expected to maintain an extended pause, signalling a stable interest rate environment. In such a regime, debt fund categories that focus on shorter-duration instruments and accrual-based strategies appear well-positioned to deliver consistent returns with relatively low volatility.
Short-duration funds that actively manage duration and selectively tap marginally lower-rated credit, such as AA-rated instruments, often generate stronger relative performance. The Nippon India Short Duration Fund (NSDF) is a notable example of this approach. Over the past seven years, it has posted an annualised return of 7.2 per cent. The fund’s strategy centres on maintaining a Macaulay duration of one to three years — in line with category norms — while making tactical shifts to capture opportunities across interest rate cycles and evolving liquidity conditions.
Portfolio
NSDF primarily invests in corporate bonds, government securities and money market instruments. It maintains strict adherence to its mandate by ensuring that no security in the portfolio carries a duration beyond five years. Unlike several peers in the short-duration category that occasionally hold ultra-long papers of up to 30 years, the fund limits itself to instruments with a residual maturity of not more than seven years. This disciplined framework keeps the portfolio firmly away from long-tenor, high-volatility exposures and supports stable outcomes for investors with 6–18-month horizons. While this approach effectively curbs duration risk, it also means the fund may capture less upside during strong bond market rallies. Over the last five years, its portfolio Macaulay duration has ranged between 1.7 and 3 years.
As per the latest portfolio, the fund has invested notably in State Government Securities (SGS) in the five- to six-year maturity bucket, where spreads over G-secs are relatively attractive. With an 18–20 per cent allocation to SGS and a combined G-sec/SGS exposure of around 32 per cent, the fund captures healthy accrual and capital appreciation without stretching duration risk. It holds about 52 per cent in corporate bonds with a diversified, AAA-heavy mix.
The fund employs a robust credit evaluation process supported by nine credit analysts and an Early Warning Signals (EWS) system outsourced to CRISIL. This system monitors 56 parameters daily, including financial metrics, management changes, negative news flow and share price movements. Any high-risk trigger requires justification and approval from the Chief Risk Officer and the Investment Committee. This proactive monitoring ensures timely action and minimises credit risk. Over the years, the fund has held 12–14 per cent in non-AAA names, primarily in the AA to AA minus category and always within a maximum two- to three-year maturity band. As per the latest portfolio, its AA segment holdings include Muthoot Finance, Piramal Finance, Tata Chemicals and Jubilant Beverages.
The fund also tactically uses Overnight Index Swaps (OIS) to hedge interest rate risk. It converts fixed-coupon exposure into floating, reducing sensitivity to rate movements. Currently, 6–7 per cent of the portfolio is deployed in OIS positions, capturing spreads of 180–200 basis points on two-year OIS. This strategy enhances yield without increasing duration and provides flexibility to navigate interest rate shifts effectively.
Going ahead, the fund is expected to maintain its duration between 2.5 and 2.8 years, focusing on higher accrual income of around seven per cent rather than capital gains, according to the fund manager.
Performance
NSDF has delivered consistently above-average performance across most periods in the past seven years. Based on a three-year rolling return assessment, the fund posted an average annualised return of 6.1 per cent, marginally ahead of the category’s 5.9 per cent. Over this horizon, its returns fluctuated between 4.6 per cent and 8.4 per cent.
As of October 31, 2025, the fund’s debt portfolio reported a yield to maturity of 7 per cent, compared with the category average of 6.7 per cent. Its regular-plan expense ratio was 0.95 per cent, slightly below the peer mean of 0.97 per cent, while the direct-plan ratio stood at 0.38 per cent, a shade higher than the category average of 0.36 per cent.
The fund offers a suitable place to park short-term surplus for up to a year and can function as the base scheme for systematic transfer plans (STPs), helping investors stagger their lumpsum deployment into chosen target funds.
Published on November 22, 2025
