Ultra Short Term Debt Funds

Ultra short term debt funds are debt schemes that invest in various investment instruments that generate fixed income and have a maturity period of up to 6 months. SEBI defines an ultra short term debt fund as an open ended debt scheme with a duration period of three to six months.

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Like other liquid funds such as bank fixed deposits, best ultra short term funds can offer high returns with considerable equity. Ultra short term funds are ideal for investors who are looking to invest their finances for shorter durations with low risk and earn reasonable dividends. They are suited for investors who wish to meet their financial goals within 6 months and the average rate of returns for these funds range between 7% and 9%.

How do Ultra Short Term Funds work?

Ultra short term funds offer a higher level of liquidity than any other class of investment funds with a long-term tenure. The SEBI rule states that liquid funds are only eligible to invest in securities that mature before 91 days. However, this rule is not applicable to ultra short term debt funds. The typical investment horizon for ultra-short term funds is between a week and 18 months. If you have some surplus funds that you wish to invest for 1 to 9 months and earn quick dividends, this is your ideal choice of investment vehicle. 

Benefits of Ultra Short Term Debt Funds

Ultra short term debt funds can be used by investors for both short-term investment as well as systematic transfer plans instead of other liquid funds. For instance, instead of putting all the finances in an equity fund at once, you can invest in an ultra-short term fund and arrange to transfer a certain amount periodically to your equity fund. This way, you can enjoy dual benefits of high liquidity and dividends. 

Ultra short term debt funds are the perfect investment vehicle for short-term financial planning. Investors can choose from the best ultra short debt funds to enjoy high returns compared to liquid funds. These funds will continue to offer high returns even in low market conditions. 

Ultra short term debt funds are the perfect option to invest a portion of the retirement corpus and generate regular income via a systematic withdrawal plan. They are a smart substitute for short-term bank deposits as they can generate higher returns, and can be combined with liquid funds to build an emergency corpus fund.

The key benefits of ultra short term funds are:

  • Offers decent rates of returns across all interest cycles with sufficient liquidity.
  • Ideal investment option for people with short-term financial goals
  • The average maturity low duration makes this investment portfolio less sensitive to market interest rate fluctuation.
  • Has lower risk of interest rates and fetches higher returns than other debt funds.
  • More focus on accrued returns since investments are held till maturity. 

Things to consider before investing in Ultra Short Term Debt Funds


Although ultra short term funds have less interest rate risk, they have a certain amount of risk when compared to liquid funds. Credit rated securities in the investment portfolio may pose a credit risk and government securities may increase the volatility of the fund.


The investor can earn a return of 7 to 9% from ultra short term debt funds. Although these rates are higher than any other liquid fund, the Net Asset Value (NAV) of these funds tend to drop with an increase in the interest rates of the economy. Ultra short term debt funds are fixed income funds but not with guaranteed returns.   


There is a fee called Expense Ratio charged by ultra short term debt funds to manage your investment. The upper limit of this ratio is set to 1.05% by SEBI. Since the overall returns of these funds is high, a long holding period and low expense ratio will help you recover the money in the event of interest rate fluctuations. 

Investment Period

Ultra short term debt funds are short-term instruments, and these prices fluctuate on a daily basis with a long maturity period. These funds may sometimes seem inadequate to generate enough returns due to its short time frame. You must hold on these funds for a longer time to earn higher average maturity.

Financial Plan

You can use the ultra-short term funds for many purposes. You can just invest them for a period of 3 to 12 months or transfer them to equity funds. You can invest a lump sum in these funds and arrange a Systematic Transfer Plan(STP) to equity funds. If you need a monthly earning, you can invest a part of your superannuation fund in this portfolio and initiate a STP.  

Best Ultra Short Term Debt Funds

Some of the best ultra-short term funds in terms of features and benefits offered are:

Aditya Birla Sun Life Savings Fund

  • Chooses the best companies for investment.
  • Investment instruments typically have high yields with low risk.
  • Liquidity drives stock selection.
  • Investment strategy is reviewed through asset liability management and interest rate outlook.

ICICI Prudential Ultra Short Term Fund

  • Chooses securities with optimal returns with low risk-reward ratio.
  • Does not include government securities to reduce risk of volatility.
  • Follows a rigorous research process to choose high-yielding debt instruments.
  • Corporate bonds have the “hold till maturity” feature that generates accrual income.

HDFC Ultra Short Term Fund

  • Focus on high quality of credit and accrual income.
  • Consistently maintains high-rated securities in its portfolio.
  • Always attempts to maximize yield to maturity by managing an optimal portfolio. 

SBI Magnum Ultra Short Duration Fund

  • Enables investment that generates regular income and high liquidity.
  • Adheres to the objective of offering risk-adjusted returns to its customers.
  • Actively manages credit risk and interest rates of its portfolios.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

IDFC Ultra Short Term Fund

  • Primary investment objective is to generate steady returns by following a low-risk strategy.
  • 100% investment in top-rated debt instruments.
  • Flexibility is offered as the proportion of investment instruments may fluctuate depending upon interest rates, market conditions, inflation and other factors.

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer

You can choose from any of the above top ultra-short term debt funds after analyzing factors such as the fund performance, reason to invest and your expectations from the fund in the short and long period of time. Choose ultra short debt funds if you wish to invest for a short term and are looking for a safe alternative to bank deposits.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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