Contents
Overview
The ultra-short term funds are very much like liquid funds. The liquidity of these funds is very high as compared to the liquidity of other funds with long-term investment horizons. Under the rules set by SEBI, the investment horizon of these funds is up to 91 days. Unlike in the case of Ultra-short term bond funds.
In the case of bond funds, the investment horizon of the investment can be up to 91 days or after 91 days. The period of these short term funds is usually between 1 week to 18 months. In short, if you want to park in your extra money and earn some additional cash with your money in a short period of time, these funds are made just for you.
The basic difference between Ultra short-term funds and liquid funds
| Basis | Liquid funds | Ultra short-term funds |
|---|---|---|
| Maturity period | The money is invested in a scheme with a residual maturity of up to 91 days. | The investment could be higher than 91 days in the case of ultra-short-term funds. |
| Risk factor | Due to the lower maturity period, these funds are less risky. | The investments in these funds are not immune to market fluctuations. |
| Expense | There is no exit load charged on investment in these funds. | There is an exit load that is charged, making the investments in these funds more stable. |
| Advantage | These funds are better in case of liquidity. | The returns are much higher than in the case of liquid funds. |
Eligibility criteria of Ultra short-term funds
The person who have short-term investment need, as well as a Systematic Transfer Plan (STP), should consider these investments. It is advised to put in your money in it instead of investing in either liquid funds or lump sum payment in equity funds. You can then tell your fund manager to switch some regular money into your equity fund of the same firm. Learn how to Evaluate Best Equity Mutual Funds
This way you’ll have a dual benefit of investing money in ultra-short term funds which are highly liquid and you will earn slightly higher dividends than liquid funds. Learn how liquid funds are taxed.
Key features of Ultra-short term funds
Risk
The counterparts of ultra short-term debt mutual funds are much riskier as the former funds are invested for a short period of time. But if compared to liquid funds, these funds are quite risky. These are because of 2 reasons namely:
- The strategy of the fund manager may introduce credit risk when he invests money in low credit-rated securities in the expectation of upgrade in the future.
- In addition to this, the introduction of government securities may increase the volatility of the fund.
Return
The return earned in ultra-short term mutual fund hovers around 7-9% if everything goes well. These returns are higher than the returns of liquid funds, as these funds are riskier than liquid funds. You will earn more than what liquid funds will, in the span of a 1-9 month horizon. Although, it is considered fixed-income havens, yet it doesn’t guarantee fixed returns. The NAV of these funds will rise, with the fall of the overall interest rate of the economy.
Cost
Investments made in ultra short-term mutual funds charge an expense ratio to manage your funds. This ratio has an upper limit of 1.05% (according to SEBI). But it is advised to have a long-term holding period and lower expense ratio which will help your funds to cover the expenses during market fluctuations.
Investment horizon
The prices of the ultra short-term mutual fund may change on a daily basis & these have a relatively longer maturity. Ultra short-term funds are much more volatile than short-term funds and it may seem inadequate to generate sufficient returns. You are advised to hold these funds for longer duration owing to a higher average maturity of the underlying securities.
Objective
If you want to park extra money for a period of 3 months to a year, then these funds are perfect for you. In addition to this, you can transfer these funds to equity funds using the option of STP (Systematic Transfer Plan). You can consider these funds as emergency funds to be used in your future. If you are in need of a monthly income, then consider investing a part of your superannuation portfolio in these and initiate an SWP (Systematic Withdrawal Plan).
Tax charged on gains
When an investor makes an investment in these mutual funds, the capital gains are earned which are taxable. Different tax rates are charged on different holding periods. If you stay invested in these funds for a period of fewer than 3 years then it is counted as short-term capital gain and if it is for more than 3 years, then it comes under long-term capital gains.
Short term capital gain is charged according to the income slab of the investor. And in the case of long-term capital gains, 20% tax is charged after indexation and 10% without indexation. Learn what are the best short term investment plans to invest in 2019.
Top 5 Ultra short-term mutual funds in India
Here we present the top 5 Ultra short-term mutual funds in India according to the returns. But it should be kept in mind that there are other parameters namely, the risk involved, investment horizon, the financial goal before considering an investment. Moreover, these returns are subject to change and we don’t support investing in any of these funds. You, as an investor, can include other ratios for measurement or go for returns based on different investment horizon like 5 years or 10 years.
| Fund Name | 1-year return (in %) | 3-years Return (in %) | 5-years Return (in %) |
|---|---|---|---|
| Taurus Short-term income mutual fund | 9.16 | 3.93 | 6.25 |
| Franklin India Short term bond mutual fund | 7.87 | 8.97 | 9.38 |
| BOI AXA Ultra Short duration mutual fund | 7.43 | 8.42 | 8.73 |
| JM Floater Long-term mutual fund | 7.35 | 8.09 | 8.36 |
| L&T Floating rate mutual fund | 7.28 | 8.21 | 8.32 |
Our team of WealthBucket will provide you various services of mutual fund investment. It could be in liquid funds, short-term funds, small-cap funds or large-cap funds. For more services related to mutual funds, you can either call us at +91 9999379929 or mail us at contact@wealthbucket.in.
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