Including debt funds in your portfolio is a wise investment choice. Not only do they offer high liquidity and pose a lower risk, but they also yield high returns. Therefore they are better than bank deposits, whose interest rates often fail to beat inflation rates.
But what if your investment horizon is less than six months? Should you miss out on the benefits of debt funds? Not at all! You can invest in ultra short term debt funds.
Ultra short duration funds are a type of debt fund. They invest in debt instruments like bonds, securities, and other money market instruments that offer capital appreciation.
The Securities and Exchange Board of India (SEBI) has classified debt funds into 16 categories. If your investment horizon happens to be less than six months, you can choose to invest in funds that come under the category ‘ultra short term mutual funds.
Liquid and ultra-short-duration funds are debt mutual funds, but they differ mainly in their investment horizon and liquidity.
Liquid funds- These funds invest in debt instruments with maturities of up to 91 days, providing high liquidity and low risk. They are ideal for parking surplus funds for short periods and often offer better returns than savings accounts.
Ultra-short duration funds- These funds invest in securities with maturities between 3 and 6 months. Due to their longer duration, they may offer slightly better returns than liquid funds but carry marginally higher risk. These funds suit investors with a short-term horizon who want better returns than liquid funds.
Ultra short term mutual funds have the same portfolio composition as debt funds. However, the Macaulay Duration of the fund’s portfolio is between three and six months. The Macaulay Duration is the weighted average number of years you must hold the bond until the present value of the bond’s cash flows equals the initial amount paid for the bond.
This means that the fund managers of ultra short duration mutual funds select money market instruments so that the fund achieves its objectives in three to six months.
You should invest in ultra short term funds if:
1) Your investment horizon is three to six months.
2) You want to invest in a low-risk instrument.
3) You do not want to invest in bank deposits or savings accounts
4) You need to achieve a financial goal within six months
Like all debt funds, ultra short term funds are subject to credit risks (risk of the issuer defaulting) and liquidity risks (risk of the fund house not having enough liquidity for redeeming fund units.)
You can navigate credit risks by studying the fund’s portfolio and ensuring that all investments are made in high-rated securities. It is also important to research how competent the fund manager is.
Clearly define your investment goals. Then, you can look up the expected rates of returns to assess your expected gains. Usually, ultra short term mutual funds have returns ranging from 7% to 9%.
Do you want to invest in mutual funds? Start your investment journey today with Moneyfy by Tata Capital. Visit our website to learn more about our offerings or download the Moneyfy App.
To pick the best ultra-short-term mutual funds, consider factors like the fund's credit quality, past performance, expense ratio, and how well it matches your investment timeline of 3 to 6 months.
These funds are affected by interest rate changes. While their shorter maturity periods make them less sensitive to rate fluctuations compared to long-term funds, they can still be affected, which can impact their returns.
These funds are well-suited for investors looking to park their money for 1 to 18 months, aiming for better returns than savings accounts, and are comfortable with moderate risk. Ultra-short-duration funds are also a good choice for first-time investors entering the mutual fund market.
Ultra-short-duration funds do carry market risks, including interest rate and credit risks. While these funds aim for stability, external factors like economic slowdowns can affect their performance, resulting in either gains or temporary losses.
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24 April 2025
4 mins read
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