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.Read more
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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%.
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.
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.
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.
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.
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.
Some of the best ultra-short term funds in terms of features and benefits offered are:
Aditya Birla Sun Life Savings Fund
ICICI Prudential Ultra Short Term Fund
HDFC Ultra Short Term Fund
SBI Magnum Ultra Short Duration Fund
IDFC Ultra Short Term Fund
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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.