What is Best & Top Ultra Short Term Mutual Funds : Meaning & Benefits

What is Ultra Short-Term Mutual Funds: Basics and Benefits

The Securities and Exchange Board of India (SEBI) categorizes debt funds into 16 categories, and you can pick any that caters to your investment interests and objectives. However, if you are a conservative investor looking to make some money in 3-6 months, you may consider ultra-short mutual funds. Keep reading this post and find out why they are better than overnight funds and other debt funds. 

What Are Ultra Short-Term Mutual Funds?

Ulta short-term mutual funds, also called short-duration funds, refer to schemes that allow you to invest in money markets and debt securities. The duration of these funds usually ranges from 3-6 months. These schemes are less volatile, and you can expect them to deliver averagely stable returns in a shorter tenure. Hence, ultra-short-term mutual funds may turn out to be your go-to investment vehicle to park your surplus money. 

However, when investing in ultra short-term mutual funds, it’s crucial to understand that all ultra short-duration funds are not literally “ultra short”. Granted, their average maturity looks pretty in line with the category mandate, but it’s just the weighted average of the maturities according to the overall portfolio allocation. The actual maturity profile may differ, and a few instruments in the portfolio may feature maturities beyond the average maturity period. Ideal for conservative investors, the average returns of ultra-short-term mutual funds usually range between 7-9%. 

Mutual Funds Ultra Short Term - Key Features

Low-risk investment: If you have an investment horizon of up to six months and don’t want to take vigorous risks, ultra-short-term mutual funds are probably your best pick. These funds allow you to enjoy better returns than conventional bank account savings schemes.

Open-ended: Ultra short-term funds are always open-ended, and their maturity may vary depending on several factors. While the maturity period of ultra-short-term mutual funds is truly short, they may be longer than other liquid funds.  

Trades on NAV: You can buy or sell short-term funds according to their Net Asset Value (NAV) on the redemption day. 

Predictable returns: Being immune to interest rate changes because of their short-term maturity duration, such funds usually offer predictable returns. These funds invest in both the money market and debt securities. 

Things to Check Before Investing in the Best Ultra Short-Term Mutual Funds

The following are a few crucial factors to consider before investing in ultra-short-term mutual funds. 

Credit Quality 

Granted, ultra-short-term mutual funds are less risky. However, they are not free from credit risks. Therefore, there’s always room for the loss of invested capital. Given this, you should not pick up schemes that invest in high-credit quality instruments. 

Past Performance

You should always study your chosen fund managers’ performance track record before investing in ultra-short-term mutual funds. This will help you gain insights into the profitability of the fund across various different market and interest rate circumstances. 

Expense Ratio

Usually, ultra-short-duration funds promise comparatively low income than longer-duration funds. Generally, funds with higher expense ratios tend to generate lower overall returns. Given this, you should always choose schemes with lower expense ratios. 

Duration

You should always invest in funds with a 3-6 month duration. Anything less than three months or more than six months may not provide you with the expected returns and benefits. 

Risks

Usually, ultra-short-term funds carry three types of risks - credit risk, liquidity risk, and interest rate risk. Credit risk refers to the default risk of the underlying securities. Liquidity risk, on the other hand, refers to the fund houses' risk of lacking adequate liquidity to serve redemption requests. Interest rate risk is all about the positive or negative impact of an increase or decline in interest rates on the funds' value. You can identify these risks by carefully studying your chosen fund’s portfolio. It will help you ensure that your fund invests in quality securities reducing the credit risk. 

Investment Objectives

Identify your investment goal, horizon, and risk tolerance before moving forward to investments. Remember, ultra-short funds aim to fulfill the requirements of conservative investors with a stipulated investment horizon of up to six months. If you have longer objectives, you should find out schemes accordingly. 

Ultra Short Mutual Funds - Taxation 

Ultra short-term mutual funds are subjected to dedicated taxation. Usually, the taxation depends on the duration of your investment in such funds (holding period). Every short-term capital gain from these funds will be added to your income and taxed according to your income slab. The long-term capital gains on these funds are taxed at 20% when indexed and 10% when not indexed. 

Why Should You Invest in Short-Term Mutual Funds?

Short-term funds come with a slew of financial advantages, including the following. 

• They are ideal investment vehicles to park your capital for a short duration.
• Ultra short-term funds generally offer better returns than banks’ fixed deposits or similar investment schemes.
• With ultra-short-term funds, the risk of experiencing loss because of changing interest rates is considerably low. The shorter the duration, the lower the risk is. 

Frequently Asked Questions

Is it wise to invest in ultra-short-term funds?

If you are a conservative investor, you can park your money in ultra-short-term funds as they offer good returns and pose a low-interest rate risk. 

How does an ultra-short-term fund work?

Ultra short-term funds typically invest in fixed-income instruments with short-term maturities. You can consider these funds to amplify your money in less than a year.

Do ultra short-term funds come with a lock-in period?

No, ultra short-term mutual funds don’t feature any lock-in period. The maturity period may vary from 3 months to 6 months. Typically, ultra-short-term funds invest in bonds and securities of government organizations and corporations. 

In Conclusion

To summarize, ultra-short-term mutual funds aim to offer high liquidity, and their Macolay duration ranges between 3-6 months. You can use these funds to earn better returns than a bank’s fixed deposit or savings account. However, you should always be careful when choosing your fund. It should align well with your financial objectives and investment plan.