10 Best Ultra Short Duration Mutual Funds

What are Ultra Short Duration Funds?

Ultra Short duration funds are open ended debt funds, which primarily invest in bonds, money market instruments and other fixed income instruments of short maturities. According to SEBI guidelines, the Macaulay duration of the portfolios of ultra short duration funds have to be 3-6 months.

Why invest in Ultra Short Duration Debt Funds?

• Generate reasonable returns with sufficient liquidity across all interest rate cycles
• Suitable for investing at any given point of time for achieving short term financial goals
• Lower modified duration and short average maturity profiles of constituent bonds and other fixed income instruments reduce interest rate sensitivity
• Offer higher returns than liquid funds
• Has lower interest rate risk than other debt funds categories except Liquid Funds
• Usually has no exit load
• Focus usually on generating accrual returns by holding their investments till maturity
• May generate higher returns than many debt fund categories with higher maturity profiles during rising interest rate regimes

Table of 10 Best Ultra Short Duration Funds:

(Data as on April 28, 2025: Source: Value Research)

Also Read: Best Corporate Bond Funds

Risks of investing in Ultra Short Duration Funds

Investments in ultra short duration debt funds are subject to various risk factors associated with investments in debt and money market instruments. Some of those key risk factors are as follows:

• Credit Risk: This risk primarily refers to the chances of a fixed income security issuer defaulting on its interest or principal repayment obligation to the mutual fund scheme. This risk also includes the chances of a fall in a security’s market price due to a downgrade in its credit rating. Government securities are considered to carry nil credit risk while AAA-rated securities are considered to carry the lowest credit risk. Investors should go through the credit ratings of a fund’s portfolio constituents to get a fair idea about that fund’s credit risk profile.
• Interest Rate Risk: Market prices of existing fixed income securities have an inverse relationship with interest rates. Thus, rising interest rates may have an adverse impact on the returns of ultra-short duration funds. However, the shorter maturity profile of these funds would reduce the impact of rising interest rates on their returns.
• Concentration Risk: This risk refers to the chances of an adverse impact of a fund’s returns due to its high exposure to one or more sectors/segments of an economy. An ultra short duration fund may end up with higher exposure to a single sector or segment of an economy, relative to the other sectors/segments, due to the supply of issuances at the time of making investments. Any adverse change in the business environment, regulation or government policy related to that segment/sector may adversely impact the fund’s returns.
• Liquidity Risk: This risk refers to the inability of an ultra short duration fund to sell one or more fixed income instruments in its portfolio at short notice due to the low demand or low volume of those instruments in the secondary market. Such illiquid conditions may force an ultra short bond fund to sell such fixed income securities at loss, thereby creating an adverse impact on the NAV of that fund.
• Reinvestment Risk: This risk refers to the possibility of an ultra short duration fund reinvesting the cash inflows from its investments, resulting from coupon and principal repayments, at lower yields than its original investments.
• Prepayment Risk: Some fixed income securities give their issuers the right to call back their securities before their maturity dates. This right is usually exercised by the issuers during falling interest rates. Such exercises then may force the fund to invest the maturity proceeds in securities offering lower yields, resulting in lower interest accruals for the fund.

Tax Treatment of Ultra Short Duration Funds for Individual Investors

Individual investors redeeming their ultra short duration fund investments made before April 1, 2023 will incur long term capital gains tax @ 12.5% on their realised capital gains. However, the LTCG component cannot be used for claiming tax rebate under Section 87A of the Income Tax (IT) Act.

Capital gains realised from ultra short duration funds made on or after April 1, 2023 will be taxed as per the tax slab of the investor. However, the capital gains realised would be eligible for claiming rebate under Section 87A.

Who should invest in Ultra-Short Duration Funds?

• Investors with moderate risk appetite seeking regular income with a high degree of liquidity and lower interest rate risk
• Those wishing to park their short term surpluses
• Those seeking to save for their short term financial goals with investment horizons of 2-6 months
• Those seeking to invest in equity and hybrid funds through Systematic Transfer Plans (STP)
• Those seeking to park their emergency funds
• Those seeking higher returns than savings accounts and short term fixed deposits