Understanding Ultra Short Term Funds

Ultra Short Term funds typically invest in securities that mature in a week to 18 months. Ultra short-term funds are a category of debt funds that invest in commercial paper, treasury bills, certificate of deposit and corporate paper. Unlike Liquid Funds, who invest in securities that matures in not more than 91 days , there is no such restriction for ultra short term funds. They can invest in securities that matures in less as well as more than 91 days.

Returns and Risks

These are low risk and hence low return funds. These funds can be very different in terms of investments. Some funds buy low rated scrips in the hope that when their credit rating improves, their prices and therefore the net asset values of debt funds that have invested in them would improve as well.

Some funds actively manage their portfolio which adds some risk to the scheme, in case the fund manager miscalculates the direction of interest rates in the country. There are some funds which are more inclined towards government securities. Thus, there is lot of variation among funds in the way they invest.

Expect returns of around 7-9% from these funds. These returns are moderately higher than what a fixed deposit with bank can give.
 

Who Should Invest

If you are new to mutual funds and have trust issues with the investment in mutual funds than you can start with these funds. When there is fall in market than also you can see the appreciation in value of these funds; this will help in building trust in mutual funds. Once you understand mutual funds and your risk appetite increases, you can start investing in equity funds.

Since, these funds carries very low risk they can be a part of any investor's debt portfolio. Any investor looking to invest for a minimum period of 3 months can invest in ultra short term funds. These funds are ideal for 3 - 12 months of investment.

How Ultra Short term Funds are different from Liquid Funds

	Liquid Funds	Ultra Short Term Funds
Maturity	Invests in securities with residual maturity up to 91 days	Can invest in securities with maturity higher than 91 days
Risk	Less risky due to lower maturity period	Less immune to market fluctuations when compared to liquid funds
Returns	You can expect returns ranging 6.5% - 8%	You can expect returns in between 7% - 9%
Exit Load	No exit load	Exit load is sometimes charged.
Advantage	Better in terms of liquidity. There is also instant redemption facility up to Rs. 50,000	Gives better returns when compared to liquid funds and can be an alternative to bank fixed deposits.

How can Ultra Short Term Funds can be used by investors

• Ultra short-term funds can be held by investors looking to invest in equities, but are unsure of the direction of the market and are a looking for a right opportunity to enter. Vice-versa, investors apprehensive of high equity valuations can book profits there and park the money in ultra short-term funds before they decide what to do next.
      
• They can also be used to park funds needed before you make lump sum payments for buying a large asset such as real estate. Wealth managers advise use of ultra short-term funds for systematic transfer plans (STPs).
      
• They are best alternative to bank fixed deposits with better taxation and better returns

Taxation

Ultra Short Term funds are taxed like any debt fund. Short Term Capital Gain (less than 3 years) is taxable as per your tax slab. Long Term Capital Gain is taxed @20% with indexation. For better understanding of how returns from mutual funds are taxed you can check this post -Mutual Fund Taxation Rules

Related Links

Understanding Liquid Funds
Classification of Debt Funds
Mutual Fund Taxation Rules
Learning about Mutual Funds
Mutual Funds for beginners

Happy Investing!!!