Ultra-short-term mutual funds

Ultra-short-term mutual funds are debt schemes that invest in fixed-income earning instruments of maturities up to six months.

According to SEBI, an ultra-short-term fund is an open-ended debt scheme with short duration of about three to six months. It is similar to liquid funds and the best ultra-short-term funds can provide higher returns with comparable liquidity.

Features of Ultra-short-term funds

Ultra-short-term funds are closely related to liquid funds. It provides more liquidity than any other type of funds. It is ideal for investors who are looking to invest their money for a shorter duration. The best ultra-short-term funds in India are relatively tolerant of interest rate risks due to shorter maturity of the underlying assets when compared with the other debts funds.

• Risk: ultra-short-term mutual funds are relatively immune to interest rate risks because of the short maturity of their underlying assets. But these funds are pretty risky as compared to liquid funds. The investment strategy of the fund manager may introduce credit risk when he incorporates low-credit rated securities in the expectation of an upgrade in future. The introduction of government securities may increase the volatility of the fund more than expected.
• Return: A return of around 7% to 9% can be obtained from ultra-short-term funds. The Net Asset Value (NAV) of these funds may decrease with a rise in the overall interest rates in the economy. Hence, they are suitable for a falling interest rate regime.
• Investment Horizon: these are short duration investments. According to SEBI, Ultra-short-term mutual funds are open-ended debt scheme with short duration of about three to six months and prices of these securities may change on a day-to-day basis. They are comparatively more volatile than liquid funds, and a short time frame may be inadequate to generate sufficient returns. As compared to liquid funds, you need to hold these funds for comparatively longer horizon owing to a higher average maturity of the underlying securities.
• Taxability: you may get retunes from mutual fund schemes which can via a short term or a long-term investment. The rate of taxation depends on the holding period. Funds which has a holding period of more than 3 years are charged a long-term capital gain tax of 20% with indexation benefits. If the funds are sold before 36 months from the date of purchase, a short-term capital gain tax as per the income tax slab will be applicable.

Here are some well-performing Ultra-short-term mutual funds

• CICI Prudential Ultra Short Term Fund
• PGIM India Ultra Short Term Fund
• Aditya Birla Sun Life Savings Fund
• Mahindra ALP-Samay Bachat Yojana
• Indiabulls Ultra Short Term Fund
• Kotak Savings Fund
• SBI Magnum Ultra Short Duration Fund
• YES Ultra Short Term Fund