The mutual funds investing in fixed income securities with short-term maturity, up to six months, are called ultra short duration funds. According to SEBI (Stock Exchange Board of India), ultra short term debt funds can invest in securities that are maturing before or after 3 months.
Ultra Short Duration Funds- Returns & Risks
Ultra Short Term Funds, as the name defines, are a type of open ended debt mutual funds that invest in securities for an ultra short duration. It is often confused with liquid funds as both are almost similar in terms of liquidity and returns. Unlike liquid funds, that invest in securities that mature within 91 days, ultra short duration funds have their macaulay duration from 3 to 6 months.
Since ultra short duration funds have a short-term maturity, they are almost immune to the interest rate risks. However, these funds are considered riskier than other liquid funds. In case, the fund manager engages in low-rated securities expecting it to be upgraded in the future, the credit risk eventually increases.
However, if all the invested sectors are going consistent and there are no downturns in the portfolio, the investors may get approximately 7% to 9% returns on ultra short term funds. This approximate returns of these funds are comparatively higher than the returns accrued by other debt liquid funds. Additionally, ultra short duration funds tend to give higher returns than Bank Fixed Deposits of equal or comparable tenure.
SEBI has also mandated the expense ratio to be charged as fees to be up to 1.05%.
Who should Invest?
- If you are a conservative debt investor who wants to park his money for at least 3 months at almost zero risk of loss and high liquidity then you may go for this fund. You can also use this money to pay the insurance premium or clear dues that are 6 months away
- If you want to take advantage of the rate changes and low yields, then this is one of the safest instruments because of the very short maturity of the investment. You can use it along with Liquid Funds to build an emergency fund that has high liquidity and can be withdrawn in a short time
- If you need a regular monthly income, then ultra short duration funds are free to be used by the investors as short-term investment options via lump sum as well as Systematic Transfer Plans (STPs) instead of Liquid Funds. You can also park a part of your retirement portfolio in UST Funds
- Investors looking for an alternative to bank deposits can opt for this fund
- Fixed Returns
As a debt fund, ultra short funds give fixed returns as soon as the securities mature along with the money generated from a fixed rate of interest on the invested money. It also gives higher returns than Liquid Funds and Bank FDs.
- Low Risks
Being a fund of short duration, the fund involves lesser risks of interest rate changes. The risk return ratio is lower than many other debt funds. Even though ultra short term funds are said to be more volatile as the debt profile is longer than that of Liquid Fund, they are definitely more consistent and steady as compared to the others
- High Liquidity
As money is invested for a short period of time, it is easily withdrawable. It can be used for monthly income through Systematic Withdrawal Plans (SWPs)
Things to be considered before investing
Every investment requires a sufficient amount of research and valuation of factors such as risks involved, history of returns accrued, business proficiency of the holdings, etc. Here are some of the things which must be considered by an investor before investing into any Mutual Funds:
- Financial Goal– Before making any investment decisions, it is very important to evaluate that the fund objective is aligned to your financial goals
- Fund Performance– Measuring the performance of the fund in both bullish and bearish market situations is a necessity as it helps the investors in selecting a reliable fund. One should always choose a fund which has been performing with consistency
- Fund House & Management– There are numerous Mutual Funds regulated by different AMCs (Asset Management Companies). Fund houses & Fund Managers play a very decisive role in the allocation of assets and the selection of stocks. If the management has enough experience and expertise, the fund will easily sail through promising market conditions and deliver good returns
- Costs Involved– There are different costs involved in Mutual Fund investments such as Expense Ratio, Entry Load, and Exit Load. Investors must review these costs before heading up for investments
- Other Basics from the Portfolio: There are other factors such as the fund NAV (Net Asset Value), AUM (Assets under Management), etc. which are to be viewed to make sure of the reliability and investor engagement in the fund
Top 10 Ultra Short Duration Funds to invest in 2020
Ultra Short Duration Funds are taxed as per the taxation norms of Debt Fund plans. If an investor has made a capital gain of ₹50,000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor and taxed accordingly.
If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.
Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment.
To calculate the final value of capital gains post indexation, we use the government’s Cost Inflation Index (CII) in the following formula:
Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)
Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation
Indexed Cost of Acquisition= 70000* (280/254) = 77165.35
Note: CII in the year 2015 = 254
CII in the year 2018 = 280
Final Value of Capital Gains= 100000- 77165.35 = 22834.65
Tax Payable = 20% of 22834.65 = 4566.93
How to Invest in Ultra Short Duration Funds
You can invest in ultra short duration funds through either of the following ways-
- Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
- Identity Proof (Aadhar Card)
- Canceled cheque
- Passport size photos (around 4-5)
- PAN Card
- KYC documents (for KYC verification)
- Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
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