Debt Funds — Overnight, Liquid, Money Market, Ultra Short and Short Term
The shortest-dated debt categories are defined by the maturity or Macaulay duration of what they hold: Overnight, Liquid, Money Market, Ultra Short Term, Ultra Short to Short Term and Short Term. This lesson explains the definitions, what duration measures and the risks that remain.
Maturity and Macaulay duration
A debt security is a loan to its issuer, who pays interest and returns the principal on a fixed date, the maturity. Macaulay duration is the average time, in years, until a bond's interest and principal payments are received, with each payment weighted by its present value; for a fund it is worked out across the whole portfolio.
SEBI's categorisation defines the short-end debt categories by one of these two measures: the maturity of the securities held, or the Macaulay duration of the portfolio.
The six short-end categories
An Overnight Fund holds securities maturing in 1 day, so its portfolio is reinvested every business day. A Liquid Fund holds debt and money market securities maturing in up to 91 days. A Money Market Fund holds money market instruments maturing in up to 1 year.
An Ultra Short Term Fund keeps its Macaulay duration between 3 and 6 months. An Ultra Short to Short Term Fund keeps it between 6 and 12 months; older material calls this category Low Duration. A Short Term Fund keeps it between 1 and 3 years.
What duration measures
Bond prices move in the opposite direction to interest rates. When yields rise, an existing bond paying a lower rate is worth less, and a fund holding it sees its NAV fall.
Duration shows how sensitive a fund is to this. As a rough guide, the percentage change in NAV is the duration multiplied by the change in yield, in the opposite direction. A fund with a duration of 2 years falls by about 2% if yields rise by 1 percentage point. Strictly, the calculation uses modified duration, which is slightly lower than Macaulay duration, so the figure is an approximation.
The shorter the duration, the less the NAV moves when rates change.
The risks that remain
Short maturity lowers interest-rate risk, but it does not remove credit risk, the risk that an issuer delays or fails to pay. None of these funds is free of risk, and none guarantees capital or returns. They are market-linked schemes.
Liquid funds also carry a graded exit load on redemptions made within 7 days of investing.
Rules at a glance
Short maturity, but still credit risk (illustrative arithmetic)
Assume a Liquid Fund has 2% of its portfolio in a short-term paper of one company, due in 45 days. A change in interest rates barely affects the price of a 45-day paper.
Now assume the company fails to repay on the due date and the paper's value is marked down by half. The fund's NAV falls by about 2% × 50% = 1%, however short the maturity was. Interest-rate risk and credit risk are separate risks.
Estimating the effect of a rise in yields (rough guide, assumed figures)
- Assume a Short Term Fund has a Macaulay duration of 2 years and an NAV of ₹20.00, and that yields rise by 0.50 percentage point.
- Approximate change in NAV = duration × change in yield, in the opposite direction = 2 × 0.50% = 1.00% fall.
- 1.00% of ₹20.00 = ₹0.20, so the NAV moves to about ₹20.00 − ₹0.20 = ₹19.80, before counting the interest the portfolio goes on earning.
- For an Ultra Short Term Fund with an assumed duration of 0.5 year (6 months), the same rise gives 0.5 × 0.50% = 0.25% fall.
Result. The same rise in yields moves the 2-year fund about four times as much as the 6-month fund (1.00% against 0.25%). A fall in yields of 0.50 percentage point would raise the two NAVs by about the same percentages. These are approximations.
Key points
- An Overnight Fund holds securities maturing in 1 day, a Liquid Fund up to 91 days, and a Money Market Fund money market instruments up to 1 year.
- Macaulay duration bands: Ultra Short Term 3 to 6 months, Ultra Short to Short Term 6 to 12 months, Short Term 1 to 3 years.
- As a rough guide, a fund with a duration of 2 years falls by about 2% if yields rise by 1 percentage point.
- The shorter the duration, the less the NAV moves when interest rates change.
- Short maturity does not remove credit risk, and none of these funds guarantees capital or returns.
Common misunderstandings
- A Liquid Fund is not a savings account: it does not guarantee capital or returns and carries some credit risk.
- An Overnight Fund is not free of risk: its interest-rate risk is very low, but it is market-linked and its returns are not guaranteed.
- Low Duration is not a current category name: the 6 to 12 month band is now the Ultra Short to Short Term Fund.
Questions people ask
Which of these categories has the lowest interest-rate risk?
The Overnight Fund. It holds securities maturing in 1 day, so a change in interest rates has very little effect on its NAV.
What is the longest maturity a Liquid Fund may hold?
91 days. It may hold only debt and money market securities maturing in up to 91 days.
Why does a debt fund's NAV fall when interest rates rise?
The bonds it already holds pay a rate fixed earlier. When new bonds offer more, the older ones are worth less, and the longer the duration the larger the fall.
What this lesson relies on
- SEBI Master Circular for Mutual Funds (20 March 2026) — Chapter 3, categorisation of mutual fund schemes; provisions on exit load in liquid schemes
- SEBI circular of 26 February 2026 on categorisation of mutual fund schemes
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.