Ultra Short to Short Term Fund: How SEBI’s 6-12 Month Duration Band Works

Open the debt section of any mutual fund app and you’ll find a row of categories that sound almost identical. One of the more confusing names in that row is the ultra short to short term fund. It’s the category that sits between ultra short and short term, and SEBI defines it by one number: the portfolio’s Macaulay duration has to stay between 6 and 12 months. That single rule tells you most of what you need to know about how the fund will behave when interest rates move.

Everything below is built on SEBI’s Master Circular for Mutual Funds as on March 20, 2026. Where we use portfolio numbers, they’re hypothetical and labelled that way, because the point is to show the arithmetic, not to describe any real scheme.

Ultra short to short term fund: the SEBI definition

The master circular’s table of debt scheme categories lists it as category 4. The scheme invests in debt and money market instruments “such that the Macaulay duration of the portfolio is between 6 months to 12 months.” Its uniform description, the line every scheme in the category has to carry, says the same thing: an open ended debt scheme investing in instruments with portfolio Macaulay duration between 6 and 12 months.

A quick word on the name, because it trips people up. The same master circular still refers to a “low duration fund” in a few other paragraphs, for example in the rules on performance disclosure and distributor commission. So if you see both labels on fact sheets and in news reports, you’re looking at the same 6 to 12 month band. We’ll stick with SEBI’s category table name here.

Notice what the rule doesn’t say. It doesn’t cap the maturity of each bond at 12 months. It caps the weighted average duration of the whole portfolio. A manager can hold some paper that matures in two years and balance it with very short instruments, as long as the average lands inside the band.

Neighbours on the yield curve

It helps to see the category next to the ones on either side of it. All of these come from the same SEBI table:

• Liquid fund: only debt and money market securities with maturity of up to 91 days.
• Ultra short term fund: portfolio Macaulay duration between 3 and 6 months. We covered it in our ultra short term fund explainer.
• Ultra short to short term fund: portfolio Macaulay duration between 6 and 12 months.
• Money market fund: money market instruments with maturity of up to 1 year. Note the test here is maturity of each instrument, not portfolio duration.
• Short term fund: portfolio Macaulay duration between 1 and 3 years.

So the category is the last stop before you cross the one-year duration mark. That line matters more than it looks, as the risk-class section below shows.

The 6 to 12 month band is a cap on the portfolio’s average duration, not on any single bond. Two funds in the same category can look very different under the hood.

How duration is measured, with a sample portfolio

Macaulay duration is the weighted average time, in years, until you receive a bond’s cash flows. If the term is new to you, our guide to bond duration walks through it. At the scheme level, SEBI says duration is the weighted average of each instrument’s Macaulay duration, with weights based on each holding’s share of AUM, and the value used for AUM includes accrued interest.

Take a hypothetical Rs 100 crore portfolio:

A portfolio duration of 0.7835 years is roughly 9.4 months (0.7835 x 12). That’s comfortably inside the 6 to 12 month band, even though a quarter of the money sits in bonds with a duration well above a year.

Now say the manager likes the yields on longer corporate bonds and moves 15% of AUM out of the commercial paper bucket into them. Corporate bonds go to 40%, commercial paper to 20%. The new sum is 0.001 + 0.120 + 0.150 + 0.640 = 0.911 years, or about 10.9 months. Still legal, but the fund has quietly become more rate-sensitive. Push the corporate bond share much further and the average crosses 1 year, which breaks the category rule.

One more detail from the circular. Open ended debt schemes other than overnight, liquid, gilt and 10-year constant maturity gilt funds must hold at least 10% of net assets in liquid assets, such as cash and government securities. For Macaulay duration and most other regulatory limits, SEBI says the base is 100% of net assets. In plain terms, that 10% liquid slice counts in the average and pulls it down, which is why our sample includes a TREPS and T-bill line.

What a rate move does to the NAV

Duration also gives a rough guide to how much the NAV moves when yields change. The usual shortcut is modified duration, which is Macaulay duration divided by (1 + yield), and the approximate price change is minus modified duration times the change in yield. It’s an approximation that works best for small moves.

Assume, purely for illustration, a portfolio yield of 7% and a sudden 0.50 percentage point rise in yields across the curve:

• Ultra short to short term fund at 0.78 years: modified duration is 0.78 / 1.07, about 0.73. Price impact is roughly 0.73 x 0.50 = 0.37% down.
• Ultra short term fund at 0.40 years: 0.40 / 1.07 is about 0.37, so roughly 0.19% down.
• Short term fund at 2 years: 2 / 1.07 is about 1.87, so roughly 0.93% down.

Here’s the part we find useful. At a 7% yield, one month of interest accrual is about 7 / 12 = 0.58%. So in this example, a sharp 0.50 point jump in yields costs the 6 to 12 month fund a bit less than two-thirds of one month’s carry. That’s why the category tends to suit money you won’t touch for several months: the accrual has time to absorb a rate shock. Hold it for two weeks and a bad move can leave you in the red.

The flip side is also true. When yields fall, the same arithmetic works in your favour, and this category gains a little more than an ultra short fund would.

The risk-class grid every scheme must pick

SEBI’s Potential Risk Class (PRC) matrix asks every debt scheme to place itself in one of nine cells. One axis is the maximum interest rate risk, measured by Macaulay duration. The other is maximum credit risk, measured by a Credit Risk Value (CRV).

On the duration axis, Class I is MD of 1 year or less, Class II is MD of 3 years or less, and Class III is any duration. A fund in this category, with duration capped at 12 months by its own category rule, is a natural fit for Class I, though SEBI gives AMCs the flexibility to place a scheme in any cell, so check which one it has chosen. Class I comes with a hard limit that’s easy to miss: the maximum residual maturity of each instrument the scheme holds is three years. Central and state government securities are exempt from that cap. Our 1.6-year-duration corporate bonds above would pass; a five-year corporate bond would not.

On the credit axis, each instrument gets a score. The circular’s table gives G-secs, state development loans, repo on government securities, TREPS and cash a CRV of 13; AAA is 12; AA+ is 11; AA is 10; AA- is 9; and the scale keeps falling down to 1 for below investment grade. The scheme’s CRV is the AUM-weighted average. Class A means CRV of 12 or more, Class B means 10 or more, and Class C means below 10.

Work it through for a hypothetical book that’s 10% TREPS, 40% AAA paper and 50% AA+ paper: 0.10 x 13 + 0.40 x 12 + 0.50 x 11 = 1.3 + 4.8 + 5.5 = 11.6. That’s Class B, so with duration under a year the scheme would sit in cell B-I. Moving down the rating ladder is exactly how a fund in this category can show a slightly higher yield than its peers, and the PRC cell is where that shows up.

At this end of the curve, a noticeably higher yield usually comes from somewhere. Check the PRC cell before you check the return table.

Swing pricing and the Rs 2 lakh exemption

Swing pricing lets a debt scheme adjust its NAV when there are heavy net outflows, so the investors who stay don’t pay for those who leave. SEBI applies the framework to open ended debt schemes other than overnight, gilt and 10-year constant maturity gilt funds, so this category is covered.

In normal times it’s up to the AMC, within broad parameters set by AMFI. During a market dislocation declared by SEBI, a minimum swing factor becomes mandatory, but only for schemes that both carry a High or Very High risk-o-meter reading and sit in cells A-III, B-II, B-III, C-I, C-II or C-III. For a Class I fund, that means the mandatory swing only bites if it’s in credit class C, where the minimum is 1.5%. Our B-I example would not be forced into it. Either way, redemptions of up to Rs 2 lakh per scheme, counted at PAN level, are exempt.

Smaller rules that still matter

• No InvITs. Debt schemes may put their residual portion into InvITs, but the circular excludes overnight, liquid, ultra-short term, ultra short to short term and money market funds from that permission.
• Short-period returns. Schemes in this category have to disclose performance over 7 days, 15 days, 1 month, 3 months and 6 months, in addition to the usual longer periods. Those short windows are the ones that actually match how people use the fund.
• Different distributor incentive treatment. The additional distribution commission framework in the circular is mandatory for most schemes, but those with a duration requirement of under one year, including this category, are excluded.

Reading a fact sheet for this category

When we compare two funds in the 6 to 12 month band, this is the order we go in:

1. Current Macaulay duration. A fund at 7 months and one at 11 months are in the same category but will react quite differently to a rate move.
2. Trend in duration. If it has crept up over a few months, the manager is taking a view on rates. That can pay off, but it’s a bet.
3. PRC cell. A-I and B-I are the cleaner cells. A C-I placement tells you the scheme is allowed to take meaningful credit risk.
4. Rating mix and concentration. Look past the average. Two AA holdings that each make up a big slice of the book carry more single-name risk than the average CRV suggests.
5. Yield to maturity versus peers. Only after the first four. A higher number with a higher duration or lower credit quality isn’t a free lunch.
6. Your own holding period. The category suits money you expect to need in roughly six months to a year. For days or a few weeks, a liquid or overnight fund is the more natural fit.

None of this makes the category risk-free. NAVs can fall, there’s no guaranteed return, and a downgrade or default in one holding can hurt far more than any rate move. How much of your cash goes into each bucket matters as much as the scheme you pick; our guide to risk management covers that side of the decision.

The short version

An ultra short to short term fund must keep its portfolio Macaulay duration between 6 and 12 months, as SEBI’s March 2026 master circular lays out, and you may also see it called a low duration fund. The 10% liquid asset buffer counts when duration is measured. If it places itself in Class I on the risk grid, no non-government holding can have more than three years left to maturity. Swing pricing can apply on heavy outflows, with redemptions up to Rs 2 lakh per scheme exempt. Read the duration first, the PRC cell second and the yield last.

Disclaimer: This article is for information and education only and is not investment advice. Please do your own research or consult a SEBI-registered adviser before making any investment decision.