Ultra Short Duration Funds: Low-Risk Debt Investment

What is a Ultra Short Duration Funds ?

An ultra short duration fund is a type of debt mutual fund that invests in short-term debt instruments. The Macaulay duration of the fund ranges between 3 and 6 months.

Advantages of Ultra Short Duration Funds

Low risks

Being debt-oriented, ultra short duration funds have low volatility risks and offer stable returns on your investment.

Short-term investment

Ultra short duration funds are suitable for short-term investments if you want to redeem within 3 to 6 months.

Stable returns

Ultra short duration funds have the potential to offer stable returns comparable to a fixed deposit scheme.

Cost-effective investment

Ultra-short duration funds usually come with a low total expense ratio - an affordable option for short-term investors.

Ultra Short Duration Funds Returns Calculator

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Understanding Ultra Short Duration Funds

Table of Contents

What are ultra short duration funds?What are the features of ultra short duration mutual funds?Things to keep in mind when investing in ultra short duration funds What should be the investment horizon for ultra short duration funds?What is the tax implication of ultra short duration funds?What are the payout options?

What are ultra short duration funds?

A type of debt mutual fund , ultra short duration funds are those that invest in debt securities in such a manner that the Macaulay portfolio duration lies between 3 and 6 months. Ultra short duration funds offer stable returns on investment.

What are the features of ultra short duration mutual funds?

Park your funds for a short tenure and earn good return
Low interest rate risk since the maturity of the underlying portfolio is short-term
There’s no capping on the maximum investment amount
Returns from these funds range in the 6% to 8% limit
The funds invest in securities carrying a high credit rating

Things to keep in mind when investing in ultra short duration funds

Ultra short duration funds are not completely risk-free. There’s some element of credit risk

Check the expense ratio of such schemes. Though the ratio is low, choose a fund which has the lowest ratio for maximum investment

Compare ultra short duration funds on their returns too. A fund with the highest return is better

If your investment horizon is less than 3 months, you can explore liquid funds rather than ultra short duration funds.

What should be the investment horizon for Ultra Short Duration Funds?

Ultra short duration funds invest in securities with a short maturity period
Hence, they are suitable for short-term investments
If you want to park your surplus funds for 3 months to 6 months, you can choose ultra short duration funds
Since there’s no restriction on redemptions, you can invest your emergency corpus in these funds and let the corpus grow

What is the tax implication of ultra short duration funds?

Returns earned are taxed at your income tax slab rates
Dividends earned, if any, are taxed at your income tax slab rate

What are the payout options?

Dividend option

Earn dividends on your investment at regular intervals
Growth option

Accumulate the returns over the investment tenure and get a lump sum amount on redemption

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FAQs On Ultra Short Duration Funds

Although ultra short duration funds are low-risk investments, they are not zero-risk. They carry the risks that all debt funds carry, such as credit risk, interest rate risk, and liquidity risk.

Most ultra short duration funds do not carry an exit load. However, this rule is fund-specific, and you should check with your fund house.

Ultra short duration funds invest in bonds with a maturity period of 91 days to 180 days.

Macaulay duration is the time taken by a bond to repay investors through interest payments and capital repayments. The usual Macaulay duration for an ultra short duration fund is 3 to 6 months, which makes their interest rate risk relatively lower.

Ultra short duration funds are a good investment option for a financial goal within 6 months. However, since they are not completely risk-free, if your travel plans are certain, you should also have a less risky or risk-free backup fund.