November 09 , 2012
Debt funds are often categorized based on the tenure or duration of their holdings. A short term debt fund typically holds Government paper of three years or shorter tenure. Short term debt funds are sometimes called Income Funds. They may invest in the Government paper, bank paper (called Certificates of Deposit) or corporate paper.
According to debt theory, the market value of debt falls when interest rates in the market rise; and vice versa. This effect is less pronounced when the tenure (duration) is short. Thus, short term debt fund NAVs are relatively less sensitive to interest rates. They may however, perform slightly better when rates are falling.