What are Ultra Short Term Mutual Funds?

What-are-Ultra-Short-Term-Mutual-Funds

If you are on this page and want to explore more on Ultra Short Term Funds, then we can safely assume that you understand the concept of mutual funds, how mutual fund industry, in general, works, how to buy and sell mutual funds, different types of funds and many other mutual fund concepts.

Through this article, you will get to know more about:

  1. What is Ultra Short Term Mutual Fund?
  2. Pros & Cons of Ultra short-term mutual funds
  3. How to evaluate ultra short term debt funds?
  4. Who all should invest in Ultra Short Term Funds?
  5. Ultra Short Term Funds v/s Equity Mutual Funds
  6. Top Ultra Short Term Funds Schemes

What is Ultra Short Term Fund?

The Ultra short-term mutual funds are schemes that generate fixed returns or so-called incomes within the short-term generally for an investment period of around 1 to 9 Months.

According to the rules set by the Securities and Exchange Board of India (SEBI) for liquid funds, it has been decided that such funds can only invest in securities that mature up to 91 days. However, these rules do not apply to short term debt funds.

These funds are a type of debt funds that are invested in Commercial Paper, Certificate of Deposits, Treasury Bills besides Commercial Papers that has an average maturity of more than 91 Days. Mostly the portfolio invests in a mix of short term debt and money market instruments with a maturity period higher than 91 days.

Pros and Cons of Ultra short-term Mutual Funds:

Some of the Pros of Ultra short-term Mutual Funds Schemes are:

  1. Diversified debt portfolio with the combination of highly liquid money market instruments including treasury bills, governments bonds and securities under a single scheme plan.
  2. Primarily provides liquidity and better returns on investments compared to Liquid Funds, Fixed Deposit and Savings Account on short-term investment basis.
  3. Has low-interest rate sensitivity compared to short-term fund schemes but provides higher yields than money market funds.
  4. It offers full or partial redemption as per clients needs.
  5. A better alternative for lump sum investment in Equity Funds through STP (Systematic Transfer Plans).

Some of the Cons of Ultra Short-Term Mutual Funds Schemes are:

  1. It is subject to default risk or credit risk wherein the borrower defaults in repayment of principal or interest or both.
  2. In the event of market volatility chasing the ultra short-term funds can be futile as it is not immune to market fluctuations.
  3. Even though these funds generate fixed-return on investments still they don’t provide assured returns. As its NAV tends to fall with a rise in overall interest rate structure in an economy, therefore, making it favorable for falling interest rate policy.

How to evaluate Ultra Short Term Funds?

There are several evaluation points that need to be considered for evaluating Ultra Short Term Funds schemes.

Financials Goals:

You must initially plan your financial goals that need to be achieved. For instance, you can plan investment in Equity Fund through a Systematic Transfer Plan (STP) for a better return. You can also generate monthly returns for meeting your temporary expenses by initiating a Systematic Withdrawal Plan (SWP).

Rate of Taxes:

Investment in these funds attracts Capital Gains. Short-term Capital Gain Tax is applicable if the investment is less than 3 years based on Income slab of the investor. If the investment is more than 3 years, Long Term Capital Gain Tax rate of 20% with indexation benefit will be applicable.

Investment Vision:

Ultra Short Term Funds can be considered more volatile than the Liquid Funds and in a short frame may seem while may generate insufficient returns compared to certain timely financially goals. Therefore investment in these funds can be considered a temporary space for your invested amount that generates better returns than your Savings Accounts and FD.

Returns:

These schemes generate returns in between 7-9%; given if all the factors are positive. If the returns are compared with rest of the investment fund categories, then these funds generate ordinarily greater returns as compared to liquid funds schemes. Though these are fixed income securities but they don’t offer guaranteed returns.

Risk:

These funds are similar to other debt funds and susceptible to interest rate risk due to the short-term maturity of its underlying assets. These funds can be credit risky when funds managers invest in low-rated money market instruments expecting to generate good returns in the near future.

Who all should invest in Ultra Short Term Funds?

Ultra Short Term Funds offer slightly better returns than fixed deposits and savings accounts in Banks. This fund’s schemes are structured in a manner to take advantage of temporary fluctuations in an economy by investing in several corporate and money market instruments, therefore, it is favorable for an investor to park its surplus cash temporary basis from 1-9 months. Besides this, it is also favorable for the investors for making Systematic Transfer Plans (STP) in the equity funds that can provide him better liquidity and possibly could also earn slightly higher dividends than normal liquid funds schemes.

Ultra Short Term Funds v/s Equity Mutual Funds:

Ultra Short Term Funds
  1. Nature of investments: These funds are invested in fixed money market instruments that have an average maturity between 1 – 9 months. This scheme is suitable for the investor who likes to take low-risk and wants optimal returns of its invested amount over the short-term.
  2. Investment Motive: The core motive of investment in this scheme is to build an emergency corpus for meeting liquidity needs or parking surplus cash.
  3. Risk Involved: There is less risk of extreme price fluctuations associated with ultra-short bond funds compared to equity funds.
Equity Mutual Funds
  1. Nature of investments: These funds are invested in the equity securities of the companies. This scheme is suitable for investors who like to take higher risk and want to earn higher returns in the long run.
  2. Investment Motive: The core motive of investments in this scheme is to generate appreciation in the amount invested over the long term.
  3. Risk Involved: Equity funds are subject to various types of risks which can result in zero to negative returns i.e. capital loss

Top Ultra Short Term Funds Schemes:

ICICI Prudential Ultra Short Term Fund:

ICICI Prudential Ultra Short Term Fund has generated CAGR of 8.31% since inception.

  • Inception of ICICI Prudential Ultra Short Term Fund: The Fund was established on 3rd May, 2011
  • Net Asset:  2,917 Crore Rupees
  • Type: Open Ended
  • Exit Load: 0
  • Expense: 0.95%
  • Benchmark: NIFTY Ultra Short Term
  • Performance (CAGR) :
  • 1 Year return   : 6.33%
  • 3 year return   : 7.92%
  • 5 year return   : 9.61%

IDBI Ultra Short Term Mutual Fund:

IDBI Ultra Short Term Fund has generated CAGR of 8.09% since inception.

  • Inception of IDBI Ultra Short Term Fund : The Fund was established on 3rd Sept, 2010
  • Net Asset:  384 Crore Rupees
  • Type: Open Ended
  • Exit Load: 0
  • Expense: 0.94%
  • Benchmark: CRISIL Liquid
  • Performance (CAGR) :
    • 1 Year return   : 6.03%
    • 3 year return   : 6.67%
    • 5 year return   : 7.47%

Indiabulls Ultra Short Term Mutual Fund:

Indiabulls Ultra Short Term Fund has generated CAGR of 8.58% since inception.

  • Inception of Indiabulls Ultra Short Term Fund: The Fund was established on 6th Jan, 2012
  • Net Asset:  421 Crore Rupees
  • Type: Open Ended
  • Exit Load: 0
  • Expense: 0.70%
  • Benchmark: CRISIL Liquid
  • Performance (CAGR) :
    • 1 Year return   : 6.49%
    • 3 year return   : 7.57%
    • 5 year return   : 8.28%

L&T Ultra Short Term Fund:

L&T Ultra Short Term Fund has generated CAGR of 7.43% since inception.

  • Inception of L&T Ultra Short Term Fund : The Fund was established on 10th April, 2003
  • Net Asset:  2,144 Crore Rupees
  • Type: Open Ended
  • Exit Load: 0
  • Expense: 0.58%
  • Benchmark: CRISIL Liquid
  • Performance (CAGR) :
    • 1 Year return   : 6.50%
    • 3 year return   : 7.40%
    • 5 year return   : 8.09%

UTI Ultra Short Term Fund:

UTI Ultra Short Term Fund has generated CAGR of 7.34% since inception.

  • Inception of UTI Ultra Short Term Fund: The Fund was established on 29th Aug, 2003
  • Net Asset:  6,084 Crore Rupees
  • Type: Open Ended
  • Exit Load: 0
  • Expense: 0.96%
  • Benchmark: CRISIL Ultra Short Term Debt
  • Performance (CAGR):
    • 1 Year return   : 6.22%
    • 3 year return   : 7.42%
    • 5 year return   : 8.03%

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(Note: This content is for information purpose only. Avoid trading and investing based on the information given above. Before investing in stocks or mutual funds, please conduct proper due diligence)

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