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What Is Ultra Short Duration Fund? Is It Good to Invest? Research Team | Posted On Wednesday, March 11,2020, 04:59 PM

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What Is Ultra Short Duration Fund? Is It Good to Invest?



What Is Ultra Short Duration Fund?

These are the mutual fund schemes that select bonds or debt instruments for investment over a short-term. The average maturity period for such investments is short and thus it helps negate the interest rate fluctuations. However, they may provide lower returns than equities as they are low risk investment products.

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Things to Know While Investing in Ultra Short Duration Fund:

Investing in ultra-short funds is beneficial, only if you are keep the following things in mind:


The investors have to take care of the management fee of called the expense ratio. Since the SEBI has specified the upper limit of expense ratio to be 1.05%, the investors can recover and profit from the overall investments if they hold the funds for a long-term.

See Also: Which Type of Mutual Fund Is Best to Invest?

Investment Horizon:

The price of these funds change on a regular basis and these are more volatile investments when compared to liquid funds. Thus you need to remain invested in ultra-short funds for a longer period to generate sufficient returns.

Financial Goals:

You can use this investment instrument to serve various financial goals. If you need an avenue to park your surplus funds for a short-period, then these funds may prove beneficial. You may also use these funds to create emergency funds or park a portion of your retirement corpus. You may also initiate a STP to equity funds by using ultra-short funds by investing a lump sum amount.

Ultra Short Duration Fund Returns:

When assessed  in terms of returns, the investor can expect returns within the range of 7% to 9%. These funds they do not offer guaranteed income and thus the total income you are about to receive at maturity cannot be estimated. These investments offer favorable returns when compared to other investment options like liquid funds. The NAV of the funds fluctuate with the change in the interest rates in the economy and thus investors can expect better yield during a falling interest rate regime.

See Also: Mutual Funds with High Returns

How Ultra Short Duration Fund are Taxed?

Tax implications are an important point investors must assess before investing. The investors are  liable to pay taxes on such investments due to the capital gains. The rate of taxes imposed on your income depends on the tenure for which you remain invested. Since these are short-term investments, the STCG is added to the investor's net income and is taxed according to his income slab. For a holding period of more than 3 years, the investor's are taxed at the rate of 20% after indexation and at 10% without the benefit of indexation.

Advantages of Ultra Short Duration Fund:

  • The ultra-short-term debt funds are ideal for parking money for the short-term. Investors looking for investment opportunities for a period of 6 to 12 months can opt for such funds to generate better returns than liquid fund.
  • Investing in ultra-short-term debt funds can also be done through mutual funds that will help you generate higher returns compared to liquid funds. You can benefit from such investments as mutual funds provides higher returns during a falling interest rate regime.
  • These funds provide an avenue for the retired persons to park a portion of their retirement corpus to generate regular income through systematic withdrawal plans.
  • The best ultra-short term funds can also be used as a substitute for short-term bank deposits in order to create higher returns.
  • You may also use these funds along with liquid fund investments to build emergency fund.

Risks of Investing in Ultra Short Duration Fund:

Ultra-short term funds are ideal for conservative debt investors who want to benefit from the changing interest rates. The debt funds do not carry much of investment risk and are somewhat immune to interest rate risk due to the short maturity periods of the underlying assets. However, when compared to liquid funds, ultra-short debt funds can be a little risky.

Moreover the investor may face credit risk due to the fund manager's decision to incorporate low credit rated securities in expectation of a better return in future. Additionally the introduction of government securities may introduce some market fluctuations to the fund, more than expected.

See Also: Everything You Need To Know About Mutual Funds

Why Should You Invest in Ultra Short Duration Fund?

There are several reasons why you should invest in ultra-short term funds:

  • You may park your emergency funds in ultra-short term funds if you are no expecting to use it for the next few months.
  • These funds carry low-risk and earns better interest than savings account
  • You may invest in these funds while maintaining the liquidity of your investments as they come with no-lock in periods.

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