Ultra Short Term Mutual Fund – Concept, Workings, Features, Advantages & more

In this blog, we’ll discuss Ultra Short Term Mutual Fund, the amazing investment plan thoroughly, so you can come up with a final investment decision.  

Smart investors often prefer mutual funds whenever they are asked about their investment plan for the future.

All mutual fund schemes are focused on maximizing wealth, that’s why they work for a long-term vision. 

But, what if you have set a short-term goal? Currently, you have maintained a great amount saved in your bank account; but it can’t accomplish your short-term goal.

If you want to produce an income out of it in the coming months, of course, you will have to think about the best alternative. 

Such as, you can park your money in Ultra Short Term Mutual Fund to achieve your short-term goals.

This amazing mutual fund scheme can produce a higher return for you within a few months at a minimal risk value. 

It is the best alternative of direct investment in any short-term and safest instruments. But, should you invest in UST mutual funds or not is discussed in details here. 

What are Ultra Short Term Mutual Funds?

Ultra Short Term Mutual Fund is the best mutual fund scheme for investors to achieve a short-term goal. These funds predominantly invest in debt capitals and money market instruments.

You can park your money in this scheme for at least three months to generate a good amount of returns.

Since these mutual funds invest in debt and money market instruments, so their portfolios are less volatile. 

Generating a stable income is the primary objective of these funds that makes them quite different from other mutual funds available in the market. 

However, in most instances, people mistakenly acknowledge these funds like liquid funds, whereas both are different. Let’s discuss how?

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Difference between Ultra Short Term Funds and Liquid Funds

You can call Ultra Short Term Mutual Funds a close cousin of the Liquid funds because, at a few points, they share similar attributes. 

Ultra Short Term Funds and Liquid Funds are similar to some extent, but their duration and maturity profile represent them different from one another. 

For instance, Ultra short-term funds invest in debt and money market instruments.

Liquid funds also invest in the same instruments, but these funds mature in 91 days, whereas the UST funds allow you to invest for 3 to 6 months.  

However, UST funds focus on yield growth, whereas liquid funds don’t. 

Suppose you’ve invested in UST funds on 5th January 2021 in government securities. The yield of 3 months is 3.31%, but if you invest for six months, it is 3.52%. 

Similarly, it is 3.72% on an entire one-year investment. It provides us a clear insight that, as compared to liquid funds, UST funds generate a higher return. 

Though, there is another little difference between both these funds.

Since UST funds come with a longer duration period, they are slightly volatile as compared to liquid funds that are less volatile due to the short duration period.  

That’s why, in most instances, you may have to choose a long investment tenure to avoid market volatility impact. 

Find details of other Types of Funds here

How Do Ultra Short Term Mutual Funds Work?

Ultra short term funds can be an attractive option as compared to the liquid funds because it generates a higher return for you at a minimal risk value.

But how ultra short term mutual fund makes it possible is a critical matter of discussion.  UST funds offer you higher liquidity as compared to any other long-term investment funds. 

However, as per the Securities and Exchange Board of India (SEBI), liquid funds are allowed to invest in instruments that comprise the maturity period of not more than 91 days.

But these rules don’t apply to Ultra Short Term Mutual Funds. 

That’s why these funds can invest in securities, even though the maturity period of the given security is less than or more than 91 days.

Usually, investors can invest in these funds from 3 months to 18 months. 

Hence, if you’re looking for such mutual funds schemes where you can park your money for one month to a whole year, no wonder it is a UST Mutual Fund plan. 

You can earn a good amount of dividends on your investment if you go with this investment plan.  

Why Should you Invest in Ultra Short Term Mutual Funds?

Whenever we pick a different type of investment plan about which people generally talk less around, the first thing that pops into our mind is whether we should invest in it or not.

Ultra Short Term Mutual Funds are the best option for investors who are searching for a short-term investment option. These investment plans come with a tenure period between 3 to 6 months. 

In this way, these funds are the best alternative to liquid funds as the longer tenure period can help a fund in generating higher returns for investors. 

Your money will stay safe as these funds invest predominantly in money markets and debt instruments. Also, as compared to regular liquid funds, these funds can offer you higher dividends. 

Still, there are a few essential things you must take into account before taking a plunge into these funds. 

Find details of all types of Debt Funds here

Things to Consider before Investing in Ultra Short Term Funds

Here are various factors which you should consider before investing in Ultra Short Term Funds –

Investment Tenure

Ultra Short Term Funds are liquid funds that invest in securities to achieve a short term goal.

But this short-term fund doesn’t ask you to park your money for a maximum of 91 days, which is usual while investing in any liquid funds. 

The securities in which these funds invest comparatively come with high volatility in prices. 

For instance, the prices can go higher and down; that’s why investing for the short term can become highly risky. 

Hence, in most instances, it is possible that these funds fail to outperform if invested or for a short duration. Most of the securities held in these funds comprise of long maturity period.

That’s why, if you want to generate a good amount of returns, you’ll have to wait for a long time as compared to other liquid funds. 

Your investment tenure should be more than three months. Only then you can generate a better return.

Though, if you want to invest for more than 12 months, debt funds can be a way better option for you. 

Expense Ratio

Ultra Short Term Mutual Funds produce a higher yield as compared to other liquid funds. Still, it is lower as compared to long-term funds. 

Hence, the higher expense ratio can easily bite a big portion of returns. So make sure you park money in a fund comprising a lower expense ratio.  

High Credit Quality

Never invest in Ultra Short Term Mutual Fund with a misconception that these funds are free-of-risk. 

Even though these funds invest in short-term securities and comprise of debt capital, there are still some underlying risk concerns associated with this investment plan. 

For instance, apart from interest rate risk, ‘credit risks’ can invite problems for you if you are investing in these funds. 

In most instances, this particular segment can lead to a permanent reduction of your entire invested amount.

So make sure you invest in Ultra Short Term Funds of higher credit quality to feel risk-free.  

Don’t take a wrong step.

The short term performance of any liquid fund can’t provide you a complete overview of its excellence.

UST funds can fail to outperform as they focus more on bond yield, which keeps changing due to unexpected macro-economic factors. 

For instance, a country’s monetary policy, exchange rate, or any macro-economic factor can raise concerns. 

That’s why you shouldn’t expect higher from these funds. Apart from that, if macroeconomic factors are favorable, these funds can provide you better return, more than your expectations. 

Hence, before you step in, evaluate everything that helps you to reach the ultimate decision.  

Performance Track Record

Keep a track record of a fund house performance. Look into their working style, for how long are they working in the industry. Check the profile of every manager in the team handling these funds. 

For a detailed insight, don’t forget to check out the company’s profile. It will give you a brief overview, how the scheme will generate returns for you within a particular time frame. 

Risk and Return

Usually, risk and return go hands in hands. Even though how well the particular asset is performing, the risk probabilities stay high. 

That’s why, instead of directly picking up an asset, people prefer to invest in mutual funds because these schemes invest in multiple asset classes to earn risk-adjusted returns. 

Though, few mutual fund schemes offer you return at a zero-risk level, like the ultra-short-term mutual fund. 

However, most fund houses grab your attention on UST mutual fund owing to their less-risky nature. But we can’t ignore that these funds aren’t fully risk-free. 

Macro-economic conditions can significantly affect these funds’ performance.

But, when it comes to returns, don’t expect too much from these funds. UST funds are liquid funds that invest for a short-term goal. 

That’s why the returns captured through these funds are relatively low. But as compared to liquid returns, the returns from UST funds are relatively higher. 

Tax on Gains

Tax on gains is one of the most critical factors to note before investing your money in any mutual fund plan. 

However, how much you’ll be taxed is a subject of how long you’ll park your money on a particular investment plan.

Normally, gains are categorized as short-term capital gains (STCG) or Long Term Capital Gains (LTCG).

Benefits of Ultra Short Term Mutual Funds

Here are the list of advantages of investing in Ultra Short Term Mutual Funds –

Good to Park your Short-Term Money

Liquid funds or ultra short term mutual funds can be a pretty great choice for investors who want to earn a good return from their money within 3 to 12 months. 

Let’s assume you have a maintained good amount in your bank saving account.

For the next few months, you can invest them in Ultra Short Term Mutual Fund to generate better returns from it rather than saving it in a bank account only. 

Though, the best thing about these funds is that you can distribute the investments as per your choice. At a minimal risk ratio, investors can generate a higher return from these investment options.  

Lower Expense Ratio

Higher expense ratios often invite a stressful situation for investors. Thankfully, Ultra Short Term Mutual funds aren’t faint-hearted in this term. 

If you are ready to park your money in Short Term Mutual Funds for a year, you can invite relatively fewer expenses on your investment. 

Your investment in UST funds will be charged relatively lower than other short-term funds at the time of exit load. 

It ensures ease of entering and exit from these funds. However, the tax concern can go higher if you aren’t giving the required time to holdings.  

Add more value when UST funds are combined with liquid funds.

If you want to generate more from UST funds, you can combine them with other liquid funds. It makes these funds more productive.

As compared to the normal bank deposit, you can capture better returns from here within 3 to 6 months.

Check out all types of Hybrid Funds here                  

Ultra Short Term Mutual Funds – Conclusion

UST funds or Ultra Short Term Mutual Funds can prove to be the best MF scheme for investors who hate saving money in ordinary bank accounts. 

For the next few months, if you have no use of your saved-income, invest them in UST funds without losing a moment. 

For the next 3 to 6 months, let these funds create income out of your money. But before you step out for investment in these funds, make sure you are aware of its shortcomings. 

These funds aren’t similar to liquid funds; even though they offer you a higher return, you’ll have to understand that this scheme comes along with a certain degree of risk. 

Macroeconomic factors (e.g., monetary policy, bank rate) can drastically affect such funds’ performance as they invest predominantly in debt or money market instruments. 

But all these things become easy to manage with the fund house manager’s expertise.  

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