There are different types of based on the types of instruments they invest in and the maturity profile of those investments. Two categories that often appear similar to investors are money-market funds and short-duration funds.
primarily invest in short-term instruments maturing within one year, while short-duration funds invest in a mix of debt securities and money-market instruments with a portfolio duration of 1 to 3 years.
Although both belong to the debt fund category, they differ significantly in terms of investment horizon, risk profile, and return potential. Let’s find out.
What are money-market funds?
As per Sebi regulations, money-market funds must invest in money-market instruments with a maturity of up to 1 year.
Money-market instruments are short-term debt securities that generally mature within one year. This includes treasury bills, commercial papers, certificates of deposit, call and notice money, commercial bills, and short-term government securities.
These funds are primarily designed for investors looking to park surplus money for short periods, build an emergency corpus, or maintain liquidity while earning potentially better returns than a traditional savings account.
What are short-duration funds?
As per ‘s classification framework, short-duration funds are required to invest in debt and money market instruments and maintain a portfolio’s Macaulay duration between 1 and 3 years.
Macaulay duration is a measure that reflects the weighted average time it takes for an investor to recover the invested amount through periodic interest payments and the final repayment of principal.
The underlying instruments include government securities, high-rated corporate bonds (AAA/ AA), PSU bonds, certificates of deposit, commercial papers, and other fixed-income instruments.
The flexibility to invest across various debt segments allows short-duration funds to balance income generation with interest rate risk.
Difference between money-market and short-duration funds
Here are the key differences between money-market and short-duration funds.
Investment universe
Money-market funds invest primarily in short-term instruments such as treasury bills, commercial papers, and certificates of deposit that mature within one year. On the other hand, short-duration funds invest across a wider range of debt securities, including government bonds, corporate bonds, PSU bonds, and money-market instruments.
Maturity profile
Money-market funds hold securities with maturities of up to one year, whereas short-duration funds maintain a portfolio Macaulay duration of 1 to 3 years, giving them a longer average maturity profile.
Interest rate risk
Since money-market funds invest in very short-term securities, they are less sensitive to changes in interest rates. Short-duration funds carry relatively higher interest rate risk because of their longer duration.
Return potential
Money market funds are designed to provide stability and liquidity, with returns linked to interest rates of short-term instruments. Short-duration funds may offer slightly higher return potential by taking on additional duration risk.
Use case
Money-market funds are commonly used for emergency funds, short-term cash management, and temporary parking of surplus money. Short-duration funds are more suitable for investors seeking relatively higher income from debt investments while maintaining a moderate risk profile.
| Basis | Money Market Funds | Short Duration Funds |
| Meaning | Debt funds that invest in money market instruments with maturities of up to 1 year. | Debt funds that invest in a mix of debt and money market securities while maintaining a Macaulay duration of 1-3 years. |
| Investment Universe | Treasury Bills, Commercial Papers, Certificates of Deposit, call money, repos and other short-term instruments. | Government securities, corporate bonds, PSU bonds, Certificates of Deposit, Commercial Papers and other debt instruments. |
| Investment Horizon | Suitable for a few weeks to about 12 months. | Suitable for investors with a horizon of around 1-3 years. |
| Interest Rate Sensitivity | Lower, as securities mature quickly. | Higher than money market funds, but lower than medium- and long-duration debt funds. |
| Return Potential | Generally offers returns linked to short-term interest rates. | May offer slightly higher return potential due to a longer maturity profile. |
| Volatility | Usually lower because of limited mark-to-market fluctuations. | Relatively higher as bond prices can be affected by interest-rate movements. |
| Key Risk | Credit risk and liquidity risk are generally limited due to short maturities. | Credit risk, liquidity risk, and greater interest-rate risk compared to money market funds. |
| Ideal For | Emergency corpus, temporary parking of funds, and near-term expenses. | Investors with a 1-3 year investment horizon who are looking for potentially higher returns. |
Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.