Ultra Short Term Funds: All You Need To Know

If you are looking for an investment instrument for a short duration of up to 6 months with a low-risk exposure, ultra short-term mutual funds can be a good option for you. This category of mutual funds has a longer duration than liquid funds and overnight funds but a shorter duration than the other debt funds. 

Here is all you need to know about ultra short term mutual funds.

Ultra short-term funds are mutual funds that invest in debt and money market instruments so that the Macaulay duration of the mutual fund portfolio is between 3-6 months. Hence, ultra-short-term mutual funds are ideal for conservative investors with a 3-6 month investment horizon for specific financial goals.

In ultra short term funds, the fund manager selects debt and money market instruments based on the fund’s investment objective, making sure that the Macaulay duration is between 3-6 months.

While these mutual fund schemes may have a slightly higher risk exposure as compared to liquid funds, they are still considered to be one of the lowest-risk mutual funds. Moreover, ultra short term mutual funds have the potential to generate higher returns than liquid funds.

Ultra short term mutual funds are best suited for investors with an investment horizon of up to 6 months and a lower risk appetite. Moreover, these mutual fund schemes generally offer better returns than savings bank accounts.

Here are some important things that you must consider before investing in ultra-short-term funds:

Risks and Returns

Since ultra short term funds are debt funds, they are exposed to credit risk, interest rate risk and liquidity risk. Hence, you must study the mutual fund’s portfolio and ensure that it invests in high-rated securities, reducing the credit risk. Further, you should analyse the fund manager's investment strategy and the scheme’s past performance to understand the investment risks.

Expense Ratio

The expense ratio is a fee levied by the asset management company towards fund management services. While investing in ultra-short-term funds, you must look for schemes with a lower expense ratio to maximise your gains. 

Investment Plan

While planning your investments, you must define your investment objectives, risk tolerance, and investment horizon clearly. Ultra short term funds are designed for financial goals with an investment horizon of up to 6 months. So, if you have longer or shorter financial goals, you should look for appropriate schemes based on your investment goals.

Also Read: Mutual Funds: A Beginner's Guide To Wise Investment Decisions