Ultra Short Term Funds are a type of mutual fund that primarily invests in debt securities and money market instruments with the aim of maintaining a Macaulay Duration of between three and six months.
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This makes them a popular choice for conservative investors who have a relatively short investment horizon of 3-6 months and are looking to achieve certain financial goals within that timeframe. Despite being considered low-risk investments due to their short lending duration, these funds typically offer average returns ranging between 7 and 9%.
While they are slightly riskier than liquid funds, they are still considered one of the lowest risk categories of mutual funds available for investment. Ultra Short Term Funds provide a balanced approach for investors seeking a higher return potential than liquid funds while still prioritizing capital preservation.
With their focus on short-term investments, these funds offer a level of stability and predictability that can be appealing to cautious investors looking to grow their wealth over a relatively short period of time.
Advantages of Ultra Short Duration Funds
Low risks: Intended as low-risk investment solutions, they primarily consist of high-quality debt instruments and money market assets. Their reduced risk level stems from the high credit quality of these investments.
Low tenure: Funds focus on short time period, holding securities with 3 to 6-month maturities. This strategy minimizes the effects of interest rate fluctuations, enhancing stability compared to longer-term investments.
Returns: These mutual funds follow a conservative strategy to offer slightly better returns than standard savings accounts. The returns mainly come from interest income and capital appreciation of the securities they hold.
Taxation of Ultra Short Duration Funds
When investing in mutual funds, it is crucial to recognize that any capital gains realized from these investments are subject to taxation. The applicable tax rate hinges on the holding period of the investment. Depending on this duration, either short-term or long-term capital gain taxation will be imposed.
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Short-term capital gains are integrated into the investor’s total income and taxed at their respective marginal tax rate. Conversely, long-term capital gains are taxed at a specialized rate: 20% with indexation benefits and 10% without such adjustments.
Top Ultra Short Term Funds (1-year return)
| Name | Fund Size | Return (p.a) |
| ICICI Prudential Ultra Short Term Fund | Rs 12,586 Crs | + 7.78% |
| Axis Ultra Short Term Fund | Rs 4,651 Crs | + 7.79% |
| PGIM India Ultra Short Duration Fund | Rs 241 Crs | + 7.49% |
| Mirae Asset Ultra Short Duration Fund | Rs 1,488.82 crore | + 7.44% |
| Sundaram Ultra Short Duration Fund | Rs 2,079 Crs | + 7.64% |
| Invesco India Ultra Short Duration Fund | Rs 663 Crs | + 7.60% |
How Mirae Asset Ultra Short Duration Fund has performed so far
Top features
> The fund has 98.71% investment in Debt, of which 13.02% in Government securities, 85.72% is in Low Risk securities.
> AUM: Rs 1,488.82 crore (as on April 15, 2024)
> Benchmark: Nifty Ultra Short Duration Debt Index A-I
> Ideal Investment Horizon: 3 Months to 6 Months
> Average Maturity (Days): 171.41
> Yield: 7.44%
Things to note
1. The fund has dynamically adjusted its instrument allocation and duration in view of prevailing market conditions.
2. Tenor spreads remain attractive in view of market expectations of a peak in policy rates. Accordingly, the fund has positioned itself to capture relatively attractive market yield & instrument spreads.
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3. Going forward, system liquidity is expected to remain range bound with active management to take benefit of roll-down expected to generate alpha. Accordingly, the fund has positioned itself to take benefit of resultant market movement.
