Ultra Short Duration Mutual Funds

If you are looking for an investment option that offers the potential to earn more than a regular savings account while keeping risk relatively low, Ultra Short Duration Mutual Funds can be a suitable choice. These funds are designed for investors who want to park their money for a short period without taking high market risk. They invest mainly in debt instruments with short maturities, making them less sensitive to interest rate changes than many other debt funds.

What are Ultra Short Duration Mutual Funds?

Ultra Short Duration Mutual Funds fall under the debt mutual fund category. The investment portfolio consists of fixed income investments like treasury bills, commercial paper, certificate of deposits, and corporate bonds. The funds have a portfolio of assets with a Macaulay duration of 3 to 6 months. As the invested securities have a short maturity period, the funds are less exposed to interest rate risk than medium or long-term debt funds.

Features of Ultra Short Mutual Funds

• Investment Period: The investment period of these funds is around 3 to 6 months; hence, they are useful for short-term investments.
• Low risk: The risk is relatively low due because the investments are made in short-term debt instruments.
• High liquidity: You can withdraw your money any time as you want; thus, these funds are helpful to manage extra cash.
• Diversification: Your money is diversified in various debt instruments issued by the government, banks, and companies.

How to Invest in Ultra Short Duration Mutual Funds?

You can invest in ultra short duration mutual funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose a suitable ultra short duration mutual fund.

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why to Invest in Ultra Short Duration Mutual Funds?

• Suitable for Short-Term Goals: If you plan to use your money within a few months to a year, these funds can be a practical investment option.
• Better Management of Idle Funds: Instead of leaving excess money in a savings account, these funds may offer the opportunity to earn potentially higher returns while maintaining liquidity.
• Relatively Lower Volatility: Compared to equity funds and long-duration debt funds, Ultra Short Duration Mutual Funds generally experience lower price fluctuations.
• Easy Access to Money: Most funds allow investors to redeem their investments quickly, making them suitable for emergency or contingency funds.

Taxation of Ultra Short Duration Mutual Funds

• Taxation of Fresh Investments (Onwards from April 1, 2023): The entire capital gain by selling ultra short duration funds, irrespective of the holding period, would be short-term capital gain. This gain would be fully added to the individual's income and would be liable to Income Tax at the appropriate slab rate. There is no option for indexation.
• Taxes on Legacy Investments (Pre-April 1, 2023): The units held for or less than 24 months, then taxes will be applied according to the investor's individual income tax slab. However, for legacy units held by an individual for a period above 24 months, they will be considered LTCG and subject to a flat tax rate of 12.5%, with no indexation.