With the Securities and Exchange Board of India (SEBI) categorizing debt funds into 16 categories, investors can now choose the fund that is best suited to their investment plan. For conservative investors with an investment horizon of maximum six months, Ultra Short Mutual Funds are a good option. These funds have a longer duration than overnight funds and liquid funds but shorter duration than the other debt funds. Here, we will explore Ultra Short Term Mutual Funds and talk about everything that you need to know about them before investing.

What are Ultra Short Term Mutual Funds?

Ultra Short Term Mutual Funds invest in debt securities and money market instruments so that the Macaulay Duration of the fund’s portfolio is between three and six months. Hence, conservative investors with a 3-6 month investment horizon find these funds ideal. These funds are best suited for investors who want to meet certain financial goals in 6 months. The average returns of these funds range between 7 and 9%.

How do Ultra Short Term Funds work?

The fund manager of an Ultra Short Mutual Fund selects money market instruments and debt securities according to the investment objective of the fund ensuring that the Macaulay duration is between 3 and 6 months.

Should You Invest in Ultra Short Funds?

Since the Macaulay duration of the portfolio of an Ultra Short Fund is between 3 and 6 months, it is best suited to investors with an investment horizon of around six months and a lower risk preference. Further, these funds tend to offer better returns than keeping your funds in a savings account for a similar tenure. Also, it is important to ensure that you invest according to your financial plan and investment objectives.

Factors to consider before investing in Ultra Short Term Funds in India

Here are some important aspects that you must consider before investing in Ultra Short Term Funds in India:

Risks and Returns

An Ultra Short Term Fund is a debt fund and carries the three risks that all debt funds carry:

  1. Credit risk – which is the risk of default by the issuer of the underlying securities
  2. Interest rate risk – which is the effect of an increase or decrease in interest rates on the value of the fund
  3. Liquidity risk – which is the fund house’s risk of not having sufficient liquidity to meet redemption requests. 

Therefore, it is important to study the portfolio of the fund to ensure that it invests in high-rated securities making the credit risk negligible. Further, you should research the fund manager to see how he has performed in the past when the interest rate cycles were rising and falling. Remember, a fund manager with relevant experience in managing investments through changing interest rate regimes can ensure that the fund performs optimally. A well-managed Ultra Short Fund portfolio should earn around 7-9% returns.

Expense Ratio

The returns of an Ultra Short Term Debt Fund are usually lower than an equity fund. Therefore, investors try to reduce as many costs as possible to maximize their gains. One such cost is the expense ratio which is a fee levied by the fund house towards fund management services. You must look for schemes with a lower expense ratio.

Investment Plan

A solid investment plan is the foundation of a successful investor. You need to clearly define your investment objectives, risk tolerance, and investment horizon. It is important to understand that Ultra Short Funds are designed for conservative investors with an investment horizon of up to 6 months. If you have longer or shorter financial goals, then you must look for appropriate schemes.

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List of Ultra Short Term Mutual Funds in India

Based on the returns of the last five years, here are the list of ultra-short-term funds in India.

List of Ultra Short Term Mutual Funds in India
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
IDFC Ultra Short Term Fund Direct Growth 8.77% NA NA 0.17% NA Debt
(Ultra Short Term)
Moderately Low
HDFC Ultra Short Term Fund Direct Growth NA NA NA 0.34% NA Debt
(Ultra Short Term)
Moderately Low
ICICI Prudential Short Term Gilt Direct Plan Growth 4% 8.01% 7.76% 0.29% NA Debt
(Gilt)
Moderate
Edelweiss Short Term Fund Direct Growth -1.97% 3.58% 1.97% 0.1% NA Debt
(Short Duration)
Moderately Low
Indiabulls Short Term Fund Direct Growth 9.06% 8.23% 9.2% 0.48% NA Debt
(Short Duration)
Low
Essel Ultra Short Term Fund Super Institutional Plan Direct Growth 7.69% 7.38% 7.95% 0.22% NA Debt
(Ultra Short Duration)
Moderately Low
Essel Short Term Fund Direct Growth 8.92% 7.43% 8.07% 0.27% NA Debt
(Short Duration)
Moderately Low
BNP Paribas Short Term Fund Direct Growth 7.59% 7.23% 8.24% 0.34% NA Debt
(Short Duration)
Moderately Low
Indiabulls Ultra Short Term Direct Fund Growth 8.39% 8% 8.61% 0.29% NA Debt
(Ultra Short Duration)
Moderately Low
HDFC Short Term Debt Fund Direct Plan Growth 9.6% 7.87% 8.58% 0.25% NA Debt
(Short Duration)
Moderately Low
Taurus Short Term Income Fund Direct Growth 9.35% 4.21% 6.49% 0.26276938% NA Debt
(Liquid)
Moderately Low
Reliance Short Term Fund Direct Growth 9.83% 7.63% 8.71% 0.33% NA Debt
(Short Duration)
Moderately Low
SBI Short Term Debt Fund Direct Growth 9.94% 7.9% 8.71% 0.34% NA Debt
(Short Duration)
Moderately Low
Kotak Bond Short Term Plan Direct Growth 10.59% 8.12% 8.93% 0.32% NA Debt
(Short Duration)
Moderately Low
ICICI Prudential Short Term Fund Direct Plan Growth 10.07% 8.26% 9.24% 0.4% NA Debt
(Short Duration)
Moderate
Canara Robeco Short Term Fund Direct Growth 5.91% 7.27% 7.79% 0.72% NA Debt
(Short Duration)
Moderately Low
IDBI Ultra Short Term Fund Direct Growth 3.09% 5.79% 7.02% 0.26% NA Debt
(Ultra Short Duration)
Moderately Low
IDBI Short Term Bond Fund Direct Growth 4.17% 6.19% 7.46% 0.97% NA Debt
(Short Duration)
Moderately Low
Sundaram Short Term Debt Fund Direct Plan Growth -4.18% 3.23% 5.89% 0.26% NA Debt
(Short Duration)
Moderately Low
Tata Short Term Bond Direct Plan Growth 3.79% 5.83% 7.52% 0.28% NA Debt
(Short Duration)
Moderately Low

This is not a recommendation but a list of well-performing ultra-short mutual funds in India. Ensure that you follow your investment plan before investing.


 

Asset Management Company
Axis Mutual Fund DHFL Pramerica Mutual Fund Principal Mutual Fund
Kotak Mutual Fund Sundaram Mutual Fund BOI Axa Mutual Fund
Reliance Mutual Fund Invesco Mutual Fund Union Mutual Fund
HDFC Mutual Fund LIC Mutual Fund Taurus Mutual Fund
SBI Mutual Fund JM Financial Mutual Fund Edelweiss Mutual Fund
ICICI Prudential Mutual Fund Baroda Pioneer Mutual Fund Essel Mutual Fund
Aditya Birla Sunlife Mutual Fund Canara Robeco Mutual Fund Mahindra Mutual Fund
UTI Mutual Fund HSBC Mutual Fund Quantum Mutual Fund
Franklin Templeton Mutual Fund IDBI Mutual Fund PPFAS Mutual Fund
IDFC Mutual Fund Indiabulls Mutual Fund IIFL Mutual Fund
DSP Blackrock Mutual Fund Motilal Oswal Mutual Fund Escorts Mutual Fund
Tata Mutual Fund BNP Paribas Mutual Fund
L and T Mutual Fund Mirae Asset Mutual Fund