Under ultra-short duration mutual funds, the investment is made into a combination of fixed income securities including debt and money market instruments like corporate bonds, treasury bills, commercial paper, and certificate of deposits.

Their residual maturity period ranges from 6 months to 1 year. These are most suitable for investors who have an ideal funds and a small investment horizon ranging from a week to 18 months.

They can be closely linked with liquid funds as the only difference lies in the maturity period of the securities. As per SEBI rules, the liquid funds can only invest in securities maturing upto 91 days.

However, under ultra short term funds there is no such restriction. Thus they can invest in securities that mature both before and after the 91-day period.

This makes ultra short term funds more beneficial than liquid funds as they avoid the market volatility.

Why Should You Invest in Ultra-Short Duration Funds?

Ultra short term duration funds have become a booming option as a result of slashed bank interest rates on deposits, due to demonetization. They provide an average return of 7.5 % p.a. which gives these funds an edge over a savings bank account.

In addition to avoiding interest rate risks, these pure debt funds also have taxation benefits. If the investment in these funds are held over a period of three years, 20% tax after indexation or 10% without the benefit of indexation.

If the investments are sold before three years then short term capital gains are added to the income which is taxed as per the tax slab applicable.

Mutual fund advisors suggest these funds to inexperienced investors looking forward to invest in equities, as they provide a good exposure to return, risk and liquidity. Investment in these funds is a safe ‘first-step’ towards equity funds or any other kind of mutual fund.

Risks in mutual funds

Who Should Invest in Ultra Short Duration Funds?

These are basically debt funds that have an ideal duration of one year or so. Investors who want liquidity, as well as decent returns for a short duration, can invest in these funds.

Also, these funds give more returns than fixed deposits and other government securities. They are also relatively safer than all equity funds and direct stocks.

Why Should You Invest in Ultra Short Duration Funds?

Ultra short term funds cater to the dual need of short term investment and Systematic Transfer Plans (STP) in place of liquid funds.

In case of lump sum investment, it is advisable to prefer an ultra short term fund over an all-equity fund. This opens up the possibility of switching a fixed sum of money every month in equity funds without facing much risk.

Apart from this, it also provides the advantage of liquidity and slightly higher returns than a normal liquid fund.

Best Ultra Short Duration Funds – 2019

In order to select the best fund, an investor has to keep in mind multiple factors including the credit rating of the fund, the historical performance of the fund, duration and maturity, fund manager skills.

Should you invest in mutual funds based on past returns?

Apart from these specific requirements like investment horizon, risk appetite, financial goal also play an important role in deciding the best short term duration funds.

The following are the 5 best ultra short duration funds selected on various indicators:

5 Best Ultra Short Duration Funds
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
SBI Magnum Ultra Short Duration Fund - Direct - Growth 8.46% 7.52% 7.91% 0.34% NA Debt
(Liquid)
Low
BOI AXA Ultra Short Duration Fund - Direct - Growth 8.13% 8.24% 8.62% 0.34% NA Debt
(Ultra Short Duration)
Moderately Low
Franklin India Ultra Short Bond Fund - Super Institutional Plan - Direct Plan 9.76% 9% 9.3% 0.44% NA Debt
(Ultra Short Duration)
Moderate
Kotak Savings Fund - Direct - Growth 8.47% 7.83% 8.3% 0.29% NA Debt
(Ultra Short Duration)
Moderately Low
Aditya Birla Sun Life Savings Fund - Direct - Growth 8.7% 8.08% 8.53% 0.23% NA Debt
(Ultra Short Duration)
Moderately Low

1.SBI Magnum Ultra Short Duration Fund

Investment Objective

To provide investors with an opportunity to generate regular income with a high degree of liquidity through investments in a portfolio comprising predominantly of debt and money market instruments.

Holding

Key Details

Fund Type Open Ended
Benchmark NIFTY Ultra Short Duration Debt Index
Fund Managers Mr. Rajeev Radhakrishnan
Minimum Investment Rs 1000/-
Entry Load Nil
Exit Load Nil

 

2.BOI AXA Ultra Short Duration Fund 

Investment Objective

The fund aims to provide sound returns along with higher liquidity and lower risk by using a combination of debt and money market instruments in the portfolio. However, the scheme does not take any responsibility of assured returns.

Holding

Key Details

Fund Type Open Ended
Benchmark CRISIL Liquid Fund Index
Fund Managers Mr. Nitish Gupta ( BE (Production), MBA (Finance) )

Mr. Amit Modani ( CA, CS )

(Assistant Fund Manager)

Minimum Investment Rs 5000/-
Entry Load Nil
Exit Load Nil

3.Franklin India Ultra Short Bond Fund

Investment Objective

The investment objective concerns with investing in a combination of short term debt and money market instruments to provide consistent returns and liquidity to the investors.

Holding

Key Details

Fund Type Open Ended
Benchmark CRISIL Liquid
Fund Managers Mr.Pallab Roy

Mr. Sachin Shankar Padwal Desai

Minimum Investment Rs 10000/-
Entry Load Nil
Exit Load Nil

4.Kotak Savings Fund 

Investment Objective

The investment objective of the scheme is to reduce the interest rate volatility and generate returns through investing in debt and money market instruments. However, the scheme does not guarantee the fulfillment of the investment objective.

Holding

Other Information

Fund Type Open Ended
Benchmark NIFTY Ultra-Short Term
Fund Managers Mr. Deepak Aggarwal ( Phd. (Commerce), CA, CS )
Minimum Investment Rs 5000/-
Entry Load Nil
Exit Load Nil

5. Aditya Birla Sun Life Savings Fund

Investment Objective

The objective of the scheme deals with providing the ease of savings account to the investors. The scheme invests in debt and other money market instruments to provide higher post-tax earnings.

Holding

Key Details

Fund Type Open Ended
Benchmark CRISIL Short-Term Bond
Fund Managers Mr. Kaustubh Gupta ( CFA Level 2)

Ms. Sunaina da Cunha ( CFA, MBA )

Minimum Investment Rs 1000/-
Entry Load Nil
Exit Load Nil

Conclusion

There is no denying that neither type of fund is completely risk-free and does not always guarantee a higher return. But under ultra short duration funds, the investment in debt stable returns which are decent as compared to other government securities

These funds have become increasingly popular over the past years and are preferred over savings deposits and fixed deposits

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww