What are Ultra Short Term Funds

What are Ultra Short Term Funds

Ultra Short-Term Mutual Funds invest in debt securities such as bonds with maturities between three and six months. Ultra Short Term Funds are designed to keep your money secure while attempting to earn slightly more than a traditional savings account. 

Contents:

Ultra Short Term Funds 

Ultra Short Term Funds offer potentially higher returns than savings accounts by investing in short-term debt instruments, bridging the gap between liquid funds and long-term debt funds, providing a low-risk, flexible option for short- to medium-term investors.

Ultra Short Term Funds are investment options that primarily invest in short-term debt instruments. They fill the gap between liquid funds, which are meant for very short-term investments, and longer-term debt funds, which require a more extended investment commitment. 

Unlike a traditional savings account that offers a fixed interest rate, Ultra Short Term Funds aim to provide a potentially higher rate of return while still keeping the risk relatively low. They offer flexible and rewarding investment options for short- to medium-term savers who want to earn more without taking on too much risk.

For instance, consider the case of Mr. Sharma, an investor from Delhi. He invested ₹1 lakh in an Ultra Short Term Fund with an average annual return of 6%. Within six months, he earned a return of approximately ₹3,000, which was significantly higher than what he would have earned from a regular savings account.

Advantages of Ultra Short Term Mutual Funds

The main advantage of Ultra Short Term Funds is they often provide better returns compared to traditional savings accounts. This makes them an attractive option for those looking to earn more on their short-term investments. 

More such advantages are given below:

  • Immediate Access to Your Funds: One of the best things about these funds is that you can quickly withdraw your money whenever needed. This makes it a convenient option for emergencies or unplanned expenses.
  • Lower Risk Profile: Ultra Short Term Funds usually invest in secure and low-risk financial instruments like government bonds. 
  • Freedom to Withdraw Anytime: Unlike other investment options that require you to keep your money locked in for a certain period, these funds allow you to withdraw your money whenever you wish, without any penalties.
  • Diverse Investment Choices: These funds offer a range of options to suit different risk appetites. Whether you’re a cautious investor or willing to take a bit more risk for higher returns, you’ll find an Ultra Short Term Fund that fits your needs.

Ultra Short Term Funds vs Liquid Funds

The main difference between Ultra Short Term Funds and Liquid Funds is that Ultra Short Term Funds usually have a slightly longer maturity period, ranging from 3 to 6 months. On the other hand, Liquid Funds are designed for extremely short-term investments, usually up to 91 days.

ParameterUltra Short Term FundsLiquid Funds
Investment HorizonTypically designed for an investment period of 3 to 6 months, offering a bit more yield.Primarily used for very short-term needs, usually up to 91 days.
Risk LevelModerate risk due to slightly longer maturity of assets.Lower risk as they invest in highly liquid money market instruments.
ReturnsGenerally offers higher returns due to longer investment horizon.Provides lower but more stable returns suitable for immediate needs.
Exit LoadSome funds may charge an exit load if withdrawn early.Usually no exit load, making it more liquid.
Tax TreatmentTaxed based on the income tax slab if held for less than 3 years.Similar tax treatment but often held for shorter periods, affecting the tax implication.

How To Invest In Ultra Short Term Funds?

  1. Research and Selection: Start by researching various Ultra Short Term Funds available in the market. Look for funds that have consistently performed well.
  2. Risk Assessment: Evaluate your risk tolerance and investment horizon to choose a fund that aligns with your financial goals.
  3. KYC Compliance: Ensure you have completed your KYC (Know Your Customer) formalities. This is a one-time process required for all mutual fund investments.
  4. Investment Platform: Choose an investment platform like Alice Blue
  5. Fund Allocation: Decide the amount you wish to invest. You can opt for a lump sum investment or start a Systematic Investment Plan (SIP).
  6. Documentation: Complete the required documentation, which usually includes filling out an application form and providing identity and address proofs.
  7. Confirmation: Once the investment is processed, you will receive a confirmation along with the details of your investment.

Taxation On Ultra Short Term Funds

Ultra-short term funds, largely debt-oriented, are taxed as non-equity. Short-term capital gains (under 3 years) are taxed per your income slab, while long-term gains, for investments post-April 1, 2024, lack indexation benefits and are also taxed per your income slab.

Best Ultra Short Term Funds

Here are the Best Ultra Short Term Funds:

Fund NameRisk Level1-Year ReturnsFund Size (in Cr)
Nippon India Ultra Short Duration FundModerate7.4%₹5,301
ICICI Prudential Ultra Short Term FundModerate7.3%₹12,332
UTI Ultra Short Term FundModerate7.2%₹2,404
Axis Ultra Short Term FundLow to Moderate7.3%₹4,894
Tata Ultra Short Term FundLow to Moderate7.3%₹1,904
Sundaram Ultra Short Duration FundLow to Moderate7.2%₹1,517
PGIM India Ultra Short Duration FundLow to Moderate7.1%₹339
IDBI Ultra Short Term FundLow to Moderate6.6%₹146
Mirae Asset Ultra Short Duration FundLow to Moderate7.2%₹550
Aditya Birla Sun Life Savings FundModerate7.3%₹14,683

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What are Ultra Short Term Funds  – Quick Summary

  • Ultra Short Term Funds are debt funds with a maturity period of 3-6 months, offering better returns than savings accounts.
  • They are a good option for short-term investments and offer advantages like quick access to money, safety, and tax benefits.
  • When compared to Liquid Funds, Ultra Short Term Funds have a slightly longer investment horizon and can offer potentially higher returns.
  • Investing in Ultra Short Term Funds is a straightforward process, and platforms like Alice Blue make it even easier.
  • Looking to invest in the best Ultra Short Term Funds? Invest at no cost with Alice Blue. With Alice Blue’s referral program, you will get ₹ 500 for every referral and 20% of brokerage your friend pays for a lifetime – one of the highest in the industry.

Ultra Short Term Funds    – FAQs  

1. What are ultra short term funds?

Ultra short term funds are debt mutual funds that invest in securities with a maturity period of 3 to 6 months. They are ideal for investors looking for better returns than a savings account without taking on much risk.

2. Is it good to invest in ultra short term funds?

Yes, investing in ultra short term funds can be a good option for those looking for short-term investment avenues. They offer better returns than savings accounts and are generally low-risk.

3. Are ultra short term funds better than FD?

Ultra short term funds can offer better liquidity and potentially higher returns than Fixed Deposits (FDs), although they come with a slightly higher risk profile.

4. Can I invest in mutual funds for 3 months?

Yes, ultra short term funds are an excellent option for investing in mutual funds for a period as short as 3 months.

5. Are ultra short term funds taxable?

Yes, the gains from ultra short term funds are subject to taxation. The tax rate depends on the holding period of the investment. 

6. What are the benefits of ultra short term fund?

The main benefit of ultra-short-term funds is their ability to offer better returns than traditional savings accounts while maintaining high liquidity. This makes them an ideal choice for investors looking for short-term investment avenues without sacrificing profitability.

7. What is the duration of ultra short funds?

The duration of ultra short funds typically ranges from 3 to 6 months, making them suitable for short-term investment needs.

8. Is there any exit load in ultra short term fund?

Exit loads in ultra short term funds are generally minimal or non-existent, making it easy for investors to withdraw their money when needed.

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