Best Ultra Short Mutual Funds to invest in India 2024 (2024)

The investors who can start choosing ultra-short funds to invest are:

• Short term Investors: These funds, as already mentioned, are the most suitable for investors who want to invest for the short term (from 1 month to 18 months). Therefore, investors who are looking forward to short term investments can comfortably choose this fund.
• Risk-Averse Investors: These funds are invested in fixed-income assets, which means they can be suitable for investors who have a low-risk tolerance.
• Investors Seeking Alternate Source of Income: Given that these funds invest in fixed-income assets, the investors can earn a dividend over this fund with the least market effects.

The factors to be considered before investing in these funds are:

Risk: Unlike the other debt funds, these funds are somehow immune to interest rate risks, given the short maturity and underlying assets. But, when it is compared to liquid funds, ultra-short funds are known to be riskier. Therefore, you will have to line your investment based on your risk appetite.

Return: When you compare these funds to other short term funds, such as liquid funds, you can see that the returns from these funds are higher. But, the only issue would arise because they do not offer guaranteed returns. The NAV of the fund tends to fall with a rise in the whole interest rate in the economy. Hence, they are suitable for the falling interest rate regime.

Costs: The management of ultra-short funds, just like any other mutual fund, category has an expense ratio. Therefore, considering the overall returns generated through the funds when compared to liquid funds, a long period of holding and lower expense ratio would help to recover the funds gone out in the form of interest rate fluctuations.

Horizon: Ultra short funds earn from the coupon of short term underlying assets. The prices of these securities could change on a day-to-day basis and have relatively longer maturity periods. These are much more volatile than liquid funds. For this, holding a short time frame will seem inadequate to generate enough returns.

Below are certain benefits of investing in the best ultra short mutual funds –

High liquidity: These funds promise sufficient liquidity. Investors can withdraw their investments any time after investment. However, they should be wary of exit loads.

Ensures short-term goal fulfilment: Individuals can invest in these options at any time, which would help them to pursue short-term financial goals. Investors with an investment horizon of up to 1 year can benefit significantly from these instruments.

Safe from interest rate volatility: These mutual funds can offset the risks from interest rate volatility thanks to an ultra-short-term Macaulay duration.

Sufficient returns: Returns from such ultra-short-term mutual funds are more significant when compared to other funds with investments in securities with shorter maturity periods.

No exit load: Typically, these funds do not have any exit loads. Exit loads refer to the additional charge that investors need to pay when they decide to withdraw the capital before its maturity period. Still, one must check this factor before investing, as some funds may have an exit load proposition.

Accrual returns: Investors can hold such funds till maturity to generate accrual returns.

While searching for the best ultra short mutual funds, check the risks associated in detail-

Risk Default: The risk involved in these funds is low, particularly because of the short duration of the investment. However, they are not totally risk-free. There may exist a risk of default.

Taxes: Some of your returns can be chipped out in the way of taxes. Any gains from these funds are subjected to capital gains taxes in India. If the period (time gap between purchase and redemption) of gains is up to three years, the investor will be liable to pay short term capital gain tax (STCG). Any period of more than three years will attract long-term capital gain tax (LTCG). STCG is taxed as per the individual’s slab rates, and LTCG is taxed at 20% (after indexation).

FAQs

Q1. What is the investment time horizon for ultra-short funds?

The investment period for ultra-short funds is from 1 month to 18 months.

Q2. What is the lock-in tenure of ultra-short funds?

Typically, there is no lock-in period for this fund. But, to see healthy returns, you must consider several factors to exit the fund (such as market conditions, risk factors, etc).

Q3. Will ultra-short funds give me assured returns?

No, although these funds are known to offer a very low-risk factor, they are still not risk-free. They can come with a certain amount of risks as default.

Q4. Is ultra short term fund safer than FD?

While on the one hand, fixed deposits are risk-free investments, the Ultra Short Term Funds, on the other hand, carry a high level of risk.

Q5. Does the ultra-short-duration mutual fund have an exit load?

Most short funds do not have an exit load, although you might have to check with the fund house to know more.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.