Basic Features and Benefits of Ultra Short-Term Debt Funds

Introduction

Since their establishment in 1963, mutual funds have generally been treated as low risk, long-term investments. This perception is based on the fact that mutual funds generate higher revenues with longer tenures. They also have very low initial costs making them attractive to salaried professionals. If you fall into that category, you can utilise a systematic investment plan-based approach to invest small amounts consistently to generate long-term financial wealth. In recent years, more flexible variants, such as short-term and dynamic mutual funds, have emerged in the market. They offer opportunities to use idle money. That allows for a chance to create goal-specific funds that may not have been included in long-term investments.

Definition of ultra short-term funds

• Ultra short-term mutual funds are a class of mutual funds that invest in securities that mature between a week to 18 months.
• Ultra short-term funds have a very high amount of liquidity, better than long-term mutual funds. That makes them an excellent option for investors with idle money since they can invest such capital in these funds and reap a healthy profit.
• Ultra short-term funds are open-ended debt schemes, as defined by the Securities and Exchange Board of India.
• Like liquid funds, ultra-short-term mutual funds offer a high rate of returns on any interest cycle and provide sufficient liquidity.
• While oriented towards short-term mutual fund investment, ultra short-term funds can be used by investors for long-term benefits, mainly by using a systematic transfer plan. In such a case, a normal amount is siphoned off the fund and transferred to equity funds, allowing them the benefits of both high liquidity and dividends.
• Since the maturity period of an ultra short-term fund is low, it is less vulnerable to interest rate risk and market conditions.
• Ultra short-term funds are oriented towards accretion of funds over a while since, unlike liquid funds, ultra short-term funds have an exit penalty for early termination.
• While they do have an exit penalty, the low rates on such penalty makes them an ideal candidate for an emergency fund investment.

Benefits of ultra short-term funds

Additional Read: How to Choose the Best Debt Mutual Fund?

Factors to consider while investing in ultra short-term funds

• While generally low in terms of risk, ultra short-term funds are subject to three types of credit risks, discretion risk, liquidity risk etc.
• Ultra short-term funds have relatively low expense ratios.
•  Ultra short-term funds are best used when combined with a long-term equity fund as part of a systematic investment transfer.
• Ultra short-term funds have return rates similar to that of liquid funds, between 7 to 9%. However, these rates are not guaranteed and can drop significantly if the net asset value drops due to increased interest rates.
• Ultra short-term funds have a considerably larger tenure than liquid funds, with maturity of underlying assets reaching a maximum of 18 months.
• Since managers of ultra short-term funds have a higher degree of discretion on how they allocate assets, it is important to choose a fund house and fund manager who have the best reputation.

Additional Read: 7 reasons to invest in Mutual Funds

Conclusion

Ultra short-term funds are best suited for siphoning money into equity funds for long-term investment or for emergency use, like liquid funds and day funds. However, investors need to be aware of the risks associated with such funds and take appropriate consideration of their needs and decide whether ultra short-term funds suffice to fulfil it.