The mutual funds investing into fixed income securities with short-term maturity, up to six months, are called ultra short-term funds. These funds support the investors to avoid interest rate risks. However, Ultra short duration funds are still not immune to market fluctuations.
According to the standards of the Securities and Exchange Board of India (SEBI), ultra short-term mutual funds can invest in securities which are maturing before or after 3 months. Usually, the investment period for these funds may range from 7 days to 6 months. It is also believed that Ultra short-term funds offer better returns as compared to other liquid funds.
- SEBI has mandated maximum 1.05% expense ratio to be charged as fees on the Ultra short-term funds
- Ultra short duration funds are free to be used by the investors as short-term investment options as well as Systematic Transfer Plans (STPs) instead of Liquid Funds
Risks and Returns on Ultra Short-Term Funds
Since ultra short duration funds have short-term maturity, they are considered almost immune to the interest rate risks involved. However, these funds are 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.
Also, in case 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 percentage of returns is comparatively higher than the returns accrued by other debt liquid funds.
List of Ultra Short-Term Funds in India
Here is a list of mutual funds categorized as Ultra Short-Term Funds:
Ultra Short-Term Funds: Tax Treatment
Investing into Ultra-short duration funds lets investors earn on taxable capital gains. The respective taxation rate is directly associated with the holding period of the investment.
- When the holding period is less than or equal to 3-years, the capital gains are called Short-Term Capital Gains (STCG). These gains are added to the income of investors and stands taxable according to the income slab.
- When the holding period is more than or equal to 3-years, the capital gains are called Long-Term Capital Gains (LTCG). These capital gains have taxation rate of 20% after indexation benefits and 10% before indexation.
Why one Should Invest in Ultra Short Duration Funds?
The market risk typically restricts the investors from indulging into Mutual fund investments. As a result, they tend to prefer saving accounts over Mutual funds. However, Ultra Short Duration funds-which are liquid as well as less volatile can be considered as one of the best investment plans.
Ultra Short-Duration Schemes serves the investment purpose of the investors who are conservative about their resources but wishes to benefit themselves from the interest rate changes and higher returns.