Ultra Short Duration Funds
Ultra short term funds are mutual funds that invest in securities and instruments belonging to the fixed-income earning category, with maturities of up to six months. They are close to liquid funds as they offer more liquidity than any other fund category with long term investments.
As per SEBI guidelines for liquid funds, such funds cannot invest in securities that mature beyond 91 days. But these rules do not apply to ultra short term funds. These funds can invest in funds that mature before or after 91 days. The horizon for these funds ranges from a week to 18 months.
Who Should Invest in Ultra Short-Term Funds?
Ultra short term funds are fixed income mutual fund schemes that invest in debt and money market securities. They are less volatile and produce more stable income in comparison to longer duration investments. Ultra short duration fund is best suited for those having surplus funds to park for 1-9 months and earn dividends on them.
These funds are subject to both credit risk as well as interest rate risk, and hence they can be a good choice for investors who understand this kind of risk level.
Conservative investors who can remain invested for a period ranging between 3 months to 1 year should go in for these investments.
According to experts, ultra short term funds can be used by investors for both short term investments as well as for systematic transfer plans (STPs). For example, suppose a person intends to invest in equity funds instead of putting all their funds in a one-time lump sum fund. In that case, they may invest it in an ultra short term fund belonging to the same fund house and later instruct your fund manager to switch a regular amount to your equity fund every month.
It should be noted that these funds do not generate assured returns or capital safety. However, if you hold funds for more than three months, then the possibility of incurring losses is much lower.
Features of Ultra Short Term Funds
- Ultra short term funds are excellent for investors with an investment horizon of 6 months and a lower risk preference. These funds offer better returns than keeping your money in a savings bank account. While investing, you should keep your financial objectives and investment plans in mind. Some of the features of ultra short term funds are:
- Ultra short term funds are open ended funds, and the maturity varies from fund to fund.
- The maturity period of these funds is very short but longer than other liquid funds.
- Investors can buy and sell the units of these funds according to their NAV (Net Asset Value) on the day of the redemption.
- These are fixed income mutual fund schemes that invest in both debt and money market securities.
- The returns from these funds are quite predictable as they are immune to interest rate changes considering their short term maturity duration.
Factors to consider while investing in Ultra Short Term Funds
Here is a list of factors to be considered before investing in Ultra Short Term funds:
Risk
Due to the short maturity of their underlying assets, ultra short-term debt funds, unlike other debt funds, are partially immune to interest rate threats. These funds are somewhat riskier than liquid funds, nevertheless. When the fund manager includes low-credit rating securities in his investing strategy with the hope of future improvement, he may add credit risk. Additionally, the addition of government securities may cause the fund’s volatility to rise above expectations.
Return
If all other conditions are met, an investor can anticipate returns from ultra short-term funds of roughly 7% to 9%. By comparing this return rate with the various fund categories, you can see that these returns are a little more than what a liquid fund, for example, can bring in over the same one to nine-month time horizon.
These funds are havens for fixed-income investors, but they don’t provide returns that are guaranteed. When interest rates in the economy increase, these funds’ NAV(NAV) often declines. They are therefore appropriate for a system of lowering interest rates.
Cost
An expense ratio is a cost associated with managing your money in very short-term funds. SEBI limits the maximum expense ratio to 1.05%. Long-term holding periods and lower expense ratios will help recoup the money lost due to changes in interest rates compared to liquid funds, given the overall returns provided by these products.
Tax on Gains
Capital gains from investing in these funds could be taxed. The holding period, the length of time you remain invested in this fund, is used to determine the tax rate.
Short-term capital gains are capital profits generated in less than three years (STCG).
Long-term capital gains are those gained over three years or longer (LTCG).
The STCG increases the investor’s income from these funds, and his income bracket determines his tax rate. Taxes on long-term capital gains (LTCG) from these funds are 20% after indexation and 10% without it.
Financial Horizon
The short-term instruments’ coupon is how ultra short-term funds make money. These securities’ prices are subject to daily fluctuations and relatively long maturities. Since they are far more erratic than liquid funds, a brief period may not seem like enough time to produce adequate returns. Due to the higher average maturity of the underlying securities, you need to keep these products for a more extended period than you would with liquid funds.
Financial Targets
These monies are available for a range of uses. These funds may be helpful if you need to set aside money for three- to one year. Furthermore, you could want to use these to move your money to a riskier choice like equity funds.
Put a big sum of money into these funds and start an STP for systematic transfers to equity funds. You might consider them a second haven you can utilize as an emergency fund. If you require regular income, put some of your superannuation funds into them and start a systematic withdrawal plan (SWP).
Taxability of Ultra Short Term Funds
Having low maturities, the returns from ultra short term funds are predictable. The return is calculated on the rise and fall of the NAV. Gains from ultra short term mutual funds are taxable. The duration of the investment determines the tax ratio.
When investments are for less than three years maturity duration, they come under the short term capital gains category (STCG). A tax amount is charged by adding the amount of the return to your total income and then taxed as per your income tax slab rate.
On the other hand, investments with a holding period of more than three years fall under the long term capital gains (LTCG) category. They are then taxed at a rate of 20% with indexation benefit and 10% without indexation benefit.
Since gains from ultra short term funds fall under the first category of STCG, they are taxed accordingly.
Risks Involved With Ultra Short Term Funds
Even with the best ultra short term funds, there are certain risks involved, despite having a lower interest rate risk owing to their short maturity. They carry the same category of risks, just like any other mutual fund.
Credit risk- The fund manager’s investment strategy might have low credit quality securities, expecting to upgrade them in the future. This risk of default by the issuer of the underlying securities exposes the fund to credit risk.
Interest rate risk- There is always a risk pertaining to the increase and decrease in the interest rates on the value of the fund, even though the returns on ultra short term funds are more or less predictable owing to their short maturity duration.
Liquidity risk- This risk may arise due to the fund house’s inability of not having sufficient liquid funds to meet their redemption requests.
Hence, to minimize the above risks involved with ultra short term funds, it is important to research about the portfolio fund and ensure that investments are done in high rated securities.
Further, you need to make sure that the fund manager/ fund house has relevant experience in managing investments and switching interest rate regimes amidst rising and falling markets so that your fund performs optimally.
Advantage of Ultra Short Term Mutual Funds
Ultra short term funds invest in very short term debt funds and are practically free of any kind of market risk or interest rate risk.
There are several advantages of investing in ultra short fund portfolios which can be listed as under:
Good to park your short-term money- Any surplus money which you do not require for a period of 3 to 6 months can be parked in the ultra short term funds. You can opt for quarterly or six monthly payments, and thus make a little higher returns on your investments without taking too many additional risks.
Very low total expense ratio (TER)- These funds are required to provide MTM daily basis. However, being invested for less than a year, these funds have very low price risk levels. Also, even though these funds charge exit loads, the exit ratio is much lower than short term funds.
Best Ultra Short-Term Mutual Funds
You must examine a fund from several angles before choosing it. The best ultra-short-term mutual funds can be found using various quantitative and qualitative criteria tailored to your needs. Your financial objectives, level of risk tolerance, and investment horizon should also be considered.
According to returns over the previous three years, the following table lists India’s top 5 ultra short-term mutual funds. Investors may choose the funds depending on various investment horizons, such as returns over five or ten years. You can also insert more criteria, such as financial ratios.
ICICI Prudential Ultra Short-Term Fund Growth
ICICI Prudential Ultra Short Term Fund is an Open-ended Ultra Short Duration Debt scheme that belongs to ICICI Prudential Mutual Fund House. The fund was floated on May 03, 2011. Manish Banthia manages this fund. The Fund currently holds Assets under Management worth INR 10489.01 crore as of Jun 30, 2022. The Current NAV of this fund as of Aug 11, 2022, is INR 22.73 for the Growth option of its Regular plan.
Minimum Investment: INR 5000 is the minimum investment required, and the minimum additional investment is INR 1000. The minimum SIP investment is INR 1000.
Fund’s Performance: Its trailing returns over different time periods are: 3.77% (1yr), 5.34% (3yr), 6.15% (5yr) and 7.55% (since inception). Whereas the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
Aditya Birla Sun Life Savings-Growth
Aditya Birla Sun Life Savings Fund is an Open-ended, Ultra Short Duration Debt scheme that belongs to Birla Sun Life Mutual Fund House. The fund was floated on Apr 16, 2003. This fund is managed by Sunaina Da Cunha. The Current NAV of the Aditya Birla Sun Life Savings Fund as of Aug 11, 2022, is INR 446.33 for the Growth option of its Regular plan.
Minimum Investment: INR 1000 is the minimum investment required, and the minimum additional investment is INR 1000. The minimum SIP investment is INR 1000.
Fund’s Performance: Its trailing returns over different time periods are: 3.91% (1yr), 5.45% (3yr), 6.33% (5yr) and 7.44% (since inception). Whereas, the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
L&T Ultra Short Term Fund – Growth
L&T Ultra Short Term Fund is an Open-ended, Ultra Short Duration Debt scheme that belongs to L&T Mutual Fund House. The fund was floated on Apr 10, 2003. Mahesh A Chhabria manages this fund. The Current NAV of the L&T Ultra Short Term Fund as of Aug 11, 2022, is INR 35.90 for the Growth option of its Regular plan.
Minimum Investment: INR 10000 is the minimum investment required, and the minimum additional investment is INR 1000. The minimum SIP investment is INR 1000.
Fund’s Performance: Its trailing returns over different time periods are: 3.56% (1yr), 4.57% (3yr), 5.66% (5yr) and 7.03% (since inception). Whereas, the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
Canara Robeco Ultra Short-Term Fund Regular-Growth
Canara Robeco Ultra Short-Term Fund: Regular Plan is an Open-ended Ultra Short Duration Debt scheme that belongs to Canara Robeco Mutual Fund House. The fund was floated on Jul 14, 2008. Suman Prasad manages this fund. The Current NAV of the Canara Robeco Ultra Short-Term Fund – Regular Plan as of Aug 11, 2022, is INR 3,166.83 for the Growth option of its Regular plan.
Minimum Investment: Minimum investment required is INR 500, and the minimum additional investment is INR 500. The minimum SIP investment is INR 500.
Fund’s Performance: Its trailing returns over different time periods are: 2.89% (1yr), 3.8% (3yr), 4.77% (5yr) and 6.88% (since inception). Whereas the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
UTI Ultra Short-Term Fund Regular-Growth
UTI Ultra Short-Term Fund – Regular Plan is an Open-ended, Ultra Short Duration Debt scheme that belongs to UTI Mutual Fund House. The fund was floated on Aug 29, 2003. Ritesh Nambiar manages this fund. The Current NAV of the UTI Ultra Short Term Fund – Regular Plan as of Aug 11, 2022, is INR 3,502.38 for the Growth option of its Regular plan.
Minimum Investment: INR 500 is the minimum investment required, and the minimum additional investment is INR 500. The minimum SIP investment is INR 500.
Fund’s Performance: Its trailing returns over different time periods are: 6.17% (1yr), 5.39% (3yr), 5.18% (5yr) and 6.84% (since inception). Whereas the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
https://economictimes.indiatimes.com/uti-ultra-short-term-fund-regular-plan/mffactsheet/schemeid-1828.cms
PGIM India Ultra Short Duration Direct-Growth
PGIM India Ultra Short Duration Fund: Direct Plan is an Open-ended Ultra Short Duration Debt scheme that belongs to PGIM India Mutual Fund House. The fund was floated on Jan 01, 2013. Puneet Pal manages this fund. The Current NAV of the PGIM India Ultra Short Duration Fund – Direct Plan as of Aug 11, 2022, is INR 29.07 for the Growth option of its Direct plan.
Minimum Investment: INR 5000 is the minimum investment required, and the minimum additional investment is INR 100The minimum SIP investment is INR 1000.
Fund’s Performance: Its trailing returns over different time periods are: 3.91% (1yr), 5.92% (3yr), 7.31% (5yr) and 8.21% (since inception). Whereas the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
SBI Magnum Ultra Short Duration Fund Direct-Growth
SBI Magnum Ultra Short Duration Fund: Direct Plan is an Open-ended, Ultra Short Duration Debt scheme that belongs to SBI Mutual Fund House. The fund was floated on Jan 01, 2013.
R Arun manages this fund. The Current NAV of the SBI Magnum Ultra Short Duration Fund – Direct Plan as of Aug 11, 2022, is INR 4,959.70 for the Growth option of its Direct plan.
Minimum Investment: INR 5000 is the minimum investment required, and the minimum additional investment is INR 1000. The minimum SIP investment is INR 500.
Fund’s Performance: Its trailing returns over different time periods are: 3.68% (1yr), 4.94% (3yr), 6.13% (5yr) and 7.22% (since inception). Whereas, the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
Invesco India Ultra Short-Term Fund Direct-Growth
Invesco India Ultra Short-Term Fund: Direct Plan is an Open-ended Ultra Short Duration Debt scheme that belongs to Invesco Mutual Fund House.
The fund was floated on Jan 01, 2013. Krishna Venkat Cheemalapati manages this fund. The Current NAV of the Invesco India Ultra Short-Term Fund – Direct Plan as of Aug 11, 2022, is INR 2,340.97 for the Growth option of its Direct plan.
Minimum Investment: INR 1000 is the minimum investment required, and the minimum additional investment is INR 1000. The minimum SIP investment is INR 1000.
Fund’s Performance: Its trailing returns over different time periods are: 3.85% (1yr), 4.9% (3yr), 6.05% (5yr) and 7.39% (since inception). Whereas, the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
Tata Ultra Short-Term Fund Direct-Growth
Tata Ultra Short-Term Fund: Regular Plan is an Open-ended, Ultra Short Duration Debt scheme that belongs to Tata Mutual Fund House.
The fund was floated on Jan 22, 2019. Akhil Mittal manages this fund. The Current NAV of the Tata Ultra Short-Term Fund – Regular Plan as of Aug 11, 2022, is INR 11.77 for the Growth option of its Regular plan.
Minimum Investment: INR 5000 is the minimum investment required, and the minimum additional investment is INR 1000. The minimum SIP investment is INR 500.
Fund’s Performance: Its trailing returns over different time periods are: 3.24% (1yr), 4.16% (3yr) and 4.7% (since inception). Whereas, the returns for the same Category for a similar time duration are: 3.5% (1yr), 4.58% (3yr), and 5.13% (5yr).
Axis Ultra Short-Term Fund Direct-Growth
Axis Ultra Short-Term Fund: Direct Plan is an Open-ended, Ultra Short Duration Debt scheme that belongs to Axis Mutual Fund House. The fund was floated on Sep 10, 2018. Aditya Pagaria manages this fund. The Current NAV of the Axis Ultra Short-Term Fund – Direct Plan as of Aug 11, 2022, is INR 12.66 for the Growth option of its Direct plan.
Minimum Investment: INR 5000 is the minimum investment required, and the minimum additional investment is INR 100. The minimum SIP investment is INR 1000.
Fund’s Performance: Its trailing returns over different time periods are: 4.12% (1yr), 5.34% (3yr) and 6.2% (since inception). Whereas the returns for the same Category for a similar time duration are: 3.51% (1yr), 4.59% (3yr), and 5.14% (5yr).
Frequently Asked Questions
Open-ended debt mutual funds, known as ultra short-term funds, invest in securities with maturities between three and six months. Conservative investors who value dependable returns should choose these ETFs.
Some factors that need to be considered before investing in ultra-short duration funds are risk, return, cost, tax on gains, financial horizon, and financial targets.
Capital gains from investing in ultra short-duration funds could be taxed. The holding period, the time you remain invested in this fund, determines the tax rate.
The STCG increases the investor’s income from these funds, and his income bracket determines his tax rate. Taxes on long-term capital gains (LTCG) from these funds are 20% after indexation and 10% without it.
Due to the short maturity of their underlying assets, ultra short-term debt funds, unlike other debt funds, are partially immune to interest rate threats. These funds are somewhat riskier than liquid funds, nevertheless.
When the fund manager includes low-credit rating securities in his investing strategy with the hope of future improvement, he may add credit risk. Additionally, the addition of government securities may cause the fund’s volatility to rise above expectations.
Some of the top ultra short-term duration funds are ICICI Prudential Ultra Short-term fund growth, Aditya Birla Sun Life Savings- Growth, L&T Ultra Short Term Fund-Growth, Canara Robeco Ultra Short-term fund stable growth, UTI Ultra Short-term fund stable growth, PGIM India Ultra Short Duration Direct-growth, SBI Magnum Ultra Short Duration Fund Direct-growth, Invesco India Ultra Short-term fund direct-growth, Tata Ultra Short-term fund direct-growth, and Axis Ultra Short-term fund Direct-growth.