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Ultra Short-Term Mutual Funds are one of the latest additions to the categories of Mutual Funds. These funds invest only in fixed income securities having a very short-term maturity (3-6 months). In this blog, we will understand different aspects related to these funds.
What are Ultra Short-Term Funds
Ultra Short-Term Mutual Funds invest in bonds having a maturity period of 91 days to 180 days. Since these funds focus on bonds with extremely short durations, they offer minimal interest-rate sensitivity to the investors. Further, the risk and return levels are also lower compared to other traditional Mutual Funds. However, the strategy followed by these funds helps investors in gaining higher returns compared to money market instruments. The investors could enjoy a higher degree of freedom and generally enjoy a higher degree of return based on the investments in riskier securities as compared to the traditional bond funds. Even though there is no ‘guaranteed return’ for these funds, the investors could aim at getting returns of around 4-5% per annum based on the quality of bonds chosen by the fund manager.
How do Ultra Short-Term Mutual Funds Work
Ultra-short Term Mutual Funds invest in debt securities (bonds) as well as in money market instruments. Based on the choice of investment, the duration of the fund’s portfolio is somewhere between three to six months. Hence, rational and conservative investors looking for a marginally higher return (than the risk-free return) could take account of these funds. The fund manager selects debt securities and money market instruments based on the objective of the fund. However, the typical investment horizon could be between 3-6 months.
Who should invest in Ultra Short-Term Mutual Funds
Generally, the investors who are not willing to take too much risk in a short-term investment could choose Ultra Short-Term Mutual Funds. The dividend option also makes these funds an attractive alternative for a short-term period as the total return could be increased. The short-term investment needs of the investors could be satisfied through these funds. Besides this, the investors seeking to replace liquid funds by means of STPs (Systematic Transfer Plans) could also invest in these funds.
For instance, if an investor wishes to put a sum of Rs. 1 Lakh in an equity-based mutual fund, could invest the amount in an Ultra Short-Term Mutual Fund (within the same group) and direct the fund manager to invest a given amount in the equity fund. In this manner, the investor will not only gain a decent return on the lump sum amount but the risk element shall also be addressed.
Things to Consider as an Investor
Even though Ultra Short-Term Mutual Funds appear to be a low-risk alternative largely, there are a few things that should be taken into account if you are planning to put your money in such funds. Some of the most important things are listed as follows:
- Risk Involved: The risk involved in these funds is low, particularly, because of the short duration of the investment. However, they are not totally risk-free, especially when compared to risk-free securities. There may exist a risk of default. Investors having a low-risk appetite can go forward with these kinds of mutual funds.
- Returns: The investors should not expect too high returns from these funds such as in the case of a few equity-based mutual funds. However, the investors should understand that the average returns of 4-5% per annum are higher than most liquid funds. Besides this, the investors do not need to take higher levels of risks for achieving such returns. Furthermore, the investors must not look for ‘guaranteed’ returns from these funds.
- Cost and Expense Ratio: Expense ratio means the percentage of total funds that would be utilized for meeting the expenses of the fund like salary to fund manager, research team, etc. The investor should also take account of the expense ratio of the fund in which they wish to put the money.
- Investment Horizon: Investors looking to park their idle money for a short duration (less than 6 months) can go ahead with investment in these kinds of funds. The return offered will be high as compared to other fixed-income securities like fixed deposits, with a little increase in the risk involved. However, the investors looking for longer period investing options may park their money temporarily in these funds, till the time they find other long-term maturity funds to invest in.
- Investment Objectives: These funds could be used as a way to replace traditional bank fixed deposits or could be used as emergency funds. Ultra-short term mutual funds are also effectively used as part of the total superannuation portfolio of an investor. If the objective of the investor is to earn a higher return while ensuring the immediate availability of funds, Ultra Short-Term funds can, definitely, be better options.
- Tax Implications: Any gains from these funds are subjected to capital gains taxes in India. If the period (time gap between purchase and redemption) of gains is up to three years, the investor will be liable to pay short-term capital gain tax (STCG). Any period of more than three years will attract long-term capital gain tax (LTCG). STCG is taxed as per the individual’s slab rates and LTCG is taxed at 20% (after indexation).
How to Invest in Ultra Short-Term Mutual Funds with Nivesh
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
Frequently Asked Questions (FAQs)
1. How to Invest in Ultra Short-Term Mutual Funds Online?
An investor can invest in Ultra Short-Term Funds with Nivesh by following the steps outlined in the above article.
2. How do I choose Good Ultra Short-Term Mutual Funds?
There are several criteria based on which you can choose Ultra Short-Term Mutual Funds for your portfolio. Generally, investors prefer investing in funds that have a high rate of return. However, past performance does not guarantee future returns. Many third-party analyst websites provide a comprehensive assessment of the available options based on which you can choose any fund as per your investment needs.
