For conservative investors with an investment horizon of a maximum of six months, Ultra Short Mutual Funds are a good option. These funds have a longer duration than overnight funds and liquid funds but a shorter duration than the other debt funds.
Here, we will explore Ultra Short Term Mutual Funds and discuss everything you need to know about them before investing.
List of Ultra Short Term Mutual Funds
- Nippon India Ultra Short Duration Fund Direct Growth
- ICICI Prudential Ultra Short Term Fund Direct Growth
- Tata Ultra Short Term Fund Direct Growth
- Mahindra Manulife Ultra Short Duration Fund Direct Growth
- SBI Magnum Ultra Short Duration Fund Direct Growth
- UTI Ultra Short Duration Fund Direct Growth
- HDFC Ultra Short Term Fund Direct Growth
- LIC MF Ultra Short Duration Fund Direct Growth
- Axis Ultra Short Term Fund Direct Growth
- Aditya Birla Sun Life Savings Direct Growth
What are Ultra Short Term Mutual Funds?
Ultra Short Term Funds invest in debt securities and money market instruments so that the Macaulay Duration of the fund's portfolio is between three and six months. Hence, conservative investors with a 3-6 month investment horizon find these funds ideal.
These funds are best suited for investors who want to meet certain financial goals in 6 months. The average returns of these funds range between 7 and 9%.
Features of Ultra Short Term Funds
The major characteristics of an Ultra Short Mutual fund:
- Low Risks
They are intended to be low-risk investing solutions. Their principal holdings are high-quality debt instruments and money market assets. These investments are less risky because of their credit quality.
- Low Tenure
The concentration on short timescales is what distinguishes these funds. The securities owned in these funds typically have maturities ranging from 3 to 6 months. When compared to funds with longer investment durations, this shorter term serves to reduce the impact of interest rate changes while providing stability.
- Returns
While these mutual funds take a conservative approach, they aim to provide somewhat higher returns than regular savings accounts. These returns are mostly derived from interest income earned by the underlying securities, as well as capital appreciation.
How Do Ultra Short Funds Work?
The fund manager of an Ultra Short Mutual Fund selects money market instruments and debt securities according to the investment objective of the fund, ensuring that the Macaulay duration is between 3 and 6 months.
How Should You Invest in Ultra Short Mutual Funds?
You can invest in an ultra short-term mutual fund either directly through the AMC platform or with the help of a trusted platform like Groww. All you have to do is complete the signup and KYC process. Once done, you can go ahead and invest in the mutual funds of your choice.
Why Should You Invest in Ultra Short Funds?
The major benefits of choosing ultra short term debt funds are:
- Short Term: These are ideal for investors who want to park their capital for a short period of time - a couple of weeks or a few months.
- Low Risks: If someone invests for less than three months, the loss and risk involved are often less.
- Better than FDs: The returns from these funds are similar to the bank's fixed deposit of the same investment tenure.
Taxation Rules of Ultra Short Mutual Funds
It is important to note that when you invest in mutual funds, the capital gain from your investment will be taxed. The tax rate is determined by the length of your investment. Short-term or long-term capital gain taxation will apply depending on the duration of your investment.
Short-term capital gains from these funds are added to the investor's total income and taxed at the investor's marginal tax rate. Long-term capital gains are taxed at a rate of 20% with indexation and 10% without.
FAQs
Q1. What is ultra short duration fund meaning?
Ultra Short Term Mutual fund is a form of fund that caters to investors searching for a low-risk choice to invest their cash for a short period of time (usually 91 days or less).
Q2. How do I Select the Best Ultra Short-Term Mutual Funds?
There are various criteria to consider while selecting Ultra Short-Term Mutual Funds for your portfolio. In general, investors choose to invest in funds with a high rate of return. However, past results may not guarantee future results. Many third-party analyst websites offer a full review of the available possibilities, from which you can select any fund based on your investing appetite.
Q3. Do ultra-short funds have interest rate risks?
Although they try to reduce interest rate risk by investing in short-term securities, they are nonetheless vulnerable to interest rate changes to some extent. If interest rates rise, the fund's existing holdings may depreciate, reducing returns. In contrast, falling interest rates might result in lower revenue for investors.
Q4. Who can invest in ultra-short mutual funds?
You can invest in the funds if you have a low-risk tolerance and a short-term investment timeframe.
Q5. Does the ultra short duration fund have market risks?
Ultra-short funds are not entirely immune to market conditions. Economic downturns or financial crises can have an impact on the performance of these funds, resulting in either returns or temporary losses.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
