Low-duration funds are a category within short-term debt funds that invest in debt and money market instruments, maintaining a portfolio Macaulay duration of about 6–12 months. They dynamically allocate across corporate bonds, government securities, and money market instruments by adjusting portfolio duration within a year. Generally, these funds offer 25–50 basis points higher returns than liquid or ultra-short-term funds and often outperform one-year bank fixed deposits.
They serve as effective short-term parking avenues for emergency funds and are also suited for investors with investment horizons of three months to one year. Such funds offer stability and moderate return enhancement without taking significant interest rate risks. Upon redemption, proceeds are credited to your bank account within T+1 business days of the withdrawal request. The gains are taxed as per the investor’s applicable income tax slab, similar to interest on bank deposits.
Among the notable performers in this category is the Axis Treasury Advantage Fund (ATAF), which has delivered a 10-year compounded annual return of 6.9 per cent. It stands out for selectively taking exposure to slightly lower-rated credits, enabling it to generate marginally superior returns within its risk framework.
Duration play
ATAF follows an active management approach, guided by the prevailing interest rate environment and banking system liquidity. When liquidity is abundant and the outlook hints at potential rate cuts, the fund tends to operate at the higher end of its duration range. Conversely, in phases of tight liquidity or rising rate expectations, it shortens its duration to six months, moving closer to an ultra-short or money market stance. This dynamic duration management allows the fund to balance risk and return effectively within the low-duration space.
While there is no cap on the maturity of individual securities — it can hold instruments maturing in five to seven years — the fund ensures that the overall portfolio maturity remains within its one-year mandate. This flexibility allows tactical positioning based on yield spreads and market opportunities, ensuring an adaptive and responsive strategy across cycles. Over the past five years, its portfolio Macaulay duration has ranged between 6.8 and 12 months.
At present, the fund operates near the upper end of its duration band, maintaining a substantial bias toward corporate bonds and government securities, which together account for roughly 68 per cent of its assets. This positioning reflects supportive macro conditions, such as ample banking liquidity aided by CRR cuts, attractive spreads on two- to three-year corporate bonds relative to shorter instruments, and expectations of a rate cut in the December policy meeting. The fund house expects liquidity to remain comfortable until January 2026, aided by drawdown of government cash balance and infusion of about ₹2 trillion by the remaining 75 bps of CRR cuts.
Excess banking liquidity has already pushed short-term and money market rates lower by 50–70 bps over the past six months. This continued liquidity surplus is expected to keep short-term rates anchored within a narrow range in the coming months.
The current maturity profile indicates that about 60 per cent of the portfolio is invested in securities maturing within one year, 36 per cent in those maturing between one and five years, and the remaining 4 per cent in papers maturing beyond five years.
Selective exposure to AA-rated papers
Typically, around 80 per cent of ATAF’s portfolio is held in AAA-rated and sovereign securities, while up to 20 per cent is allocated to AA-rated papers. The fund avoids exposure below the AA level.
For non-AAA instruments, the investment approach is rooted in rigorous credit evaluation. Each issuer undergoes detailed, independent credit scrutiny encompassing financial resilience, management quality, debt-servicing record, and funding access across cycles. Currently, about 13 per cent of the portfolio is invested in AA-rated issuers such as Piramal Finance, Jubilant Beverages, Arka Fincap, Aditya Birla Renewables, and Tata Projects.
Performance
A one-year rolling return analysis over the past five years shows that ATAF delivered an average annualised return of 6.1 per cent, ahead of the category average of 5.5 per cent, with returns fluctuating between 3.2 per cent and 8.5 per cent. As of September 30, 2025, the fund’s yield to maturity (YTM) stood at 6.7 per cent, broadly in line with the category average.
The regular plan’s expense ratio is 0.67 per cent, below the category average of 0.86 per cent, while the direct plan’s expense ratio is 0.35 per cent, marginally higher than the category average of 0.32 per cent.
Published on October 18, 2025
