Risks involved while investing
While considered low risk, ultra short term funds are not entirely risk-free. Interest rate fluctuations and credit risk can impact returns. Investors should carefully assess the credit quality of the fund's portfolio.
Taxation of ultra short term funds
The tax treatment of Ultra Short Term Funds varies based on the duration of the investment. Ultra-short-term mutual funds allocate more than 65% of their investible assets to debt instruments, categorising them as non-equity investments for tax purposes.
Capital gains from units held for less than three years or 36 months are considered short-term capital gains, attracting taxation at the investor's applicable income tax slab rate.
- For investments held in ultra short duration schemes for three years or longer, the gains enjoy the benefits of long-term capital gains taxation.
- If the investment was made on or before March 31, 2023, long-term gains are taxed at 20% with the advantage of indexation benefits.
- For investments made on or after April 1, 2023, long-term capital gains from ultra short duration funds are taxed according to the investor's income tax slab rate for the relevant financial year, without the benefit of indexation.
Factors to be considered while investing in ultra short duration funds
- Investment Tenure: Ultra Short Term Mutual Funds are designed for short to intermediate-term investments. Consider aligning your investment tenure with the fund's duration, typically ranging from three months to a year. Assess your financial goals and liquidity needs before choosing the appropriate investment duration.
- Low Expense Ratio: Evaluate the expense ratio of the fund, as a lower expense ratio contributes to higher returns for investors. Look for funds with competitive expense ratios, ensuring that the costs associated with managing the fund do not significantly eat into your overall returns.
- High Credit Quality: Investors often assume that ultra-short duration funds carry no risk. While these funds indeed feature low interest rate risk, it is essential to recognise the presence of credit risks. Credit risk can lead to a permanent reduction in your investment. To mitigate this risk, prioritise funds with a high credit quality, indicating substantial allocations to AAA/A1+ rated papers. Monthly fund factsheets provide insights into a scheme's credit quality, allowing you to make informed investment decisions.In the pursuit of safety and stability in the underlying assets of ultra-short duration funds, it becomes crucial to assess the credit quality of the securities within the fund's portfolio. This emphasis on high-quality debt instruments helps minimise the potential risk of default, providing investors with greater confidence in the overall safety of their investments.
- Do Not Select a Scheme Based on Short-Term Performance: When choosing a scheme, refrain from relying solely on short-term performance indicators. Bond yields are subject to fluctuations due to macro-economic conditions, RBI's monetary policy, exchange rates, and various market-related factors. Forming return expectations based on short-term performance can be misleading. Additionally, a scheme may appear to offer higher returns by assuming greater credit risks. It is crucial to consider multiple factors, including risk assessment, personal risk tolerance, investment horizon, credit quality of the scheme, expense ratio, and more, to make well-informed investment decisions.
- Performance Track Record of the fund manager or fund house: Research the track record of the fund manager and the overall reputation of the fund house. A consistent and experienced fund manager is more likely to make sound investment decisions, contributing to the fund's performance. Similarly, opt for funds managed by reputable fund houses known for their ethical practices and transparent operations.
How to invest in ultra short term mutual funds on the Bajaj Finserv Mutual Funds platform
A step-by-step guide to invest in mutual funds
Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store
Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page
Step 3: Click on 'Mutual Funds' icon
Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page
Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list
Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating
Step 7: Click on 'Invest Now'
Step 8: Enter your mobile number and sign in using the OTP
Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video
Step 10: Enter your bank account details
Step 11: Upload your signature and provide some additional details to continue
Step 12: Choose and select the mutual fund that you want to invest in
Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’
Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS
Step 15: Once your payment is done, the investment will be complete
Your investment will start reflecting in your portfolio within 2-3 working days.
Conclusion
Ultra short duration mutual funds offer a balanced investment option for those seeking a combination of safety, liquidity, and potential returns. With a focus on short-term debt instruments, these funds cater to conservative investors with a specific time horizon. The advantages, including lower interest rate risk, potential for better returns than traditional savings instruments, and flexibility, make them suitable for various financial objectives. However, it is crucial for investors to consider factors like credit quality, expense ratio, and their own risk tolerance before making investment decisions. While not entirely risk-free, ultra short term funds provide a valuable tool for diversifying portfolios and addressing short-term financial goals. As with any investment, thorough research and understanding individual financial needs are essential for making informed choices in the dynamic landscape of mutual fund investments.
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Frequently Asked Questions
How long should I stay invested in Ultra Short Duration Mutual Funds?
Investors can choose their investment horizon based on financial goals. However, these funds are ideal for short to medium-term investment periods.
Where do Ultra Short Duration Mutual Funds invest?
These funds primarily invest in debt money market instruments with an investment horizon of a few weeks to a few months.
Are Ultra Short Duration Mutual Funds high risk?
While not high-risk, they are not risk-free. Investors should be aware of interest rate and credit risk associated with the fund's portfolio.
What kind of returns can I earn from Ultra Short Duration?
Returns vary, but historically, these funds have provided better returns than traditional savings instruments.
Will ultra-short funds give me assured returns?
No mutual fund can assure returns. Ultra Short Term Funds aim for stability, but returns are subject to market conditions.
Is ultra short term fund safer than FD?
While Ultra Short Term Funds offer liquidity and potential for higher returns, they involve market risks. FDs, being fixed-income instruments, are considered safer but offer lower returns.
What is the difference between money market and ultra short term funds?
Both aim for low risk and stable returns, but ultra short-term funds have slightly higher potential returns. They achieve this by investing in securities with maturities ranging from 3 months to 1 year, compared to money market funds which stick to even shorter maturities (typically below 3 months). This slight difference in maturity allows ultra short-term funds to tap into a wider pool of investments, potentially offering better returns.
What are the risks of ultra short term funds?
While still low risk, ultra short-term funds have two main risks: interest rate risk and credit risk. If interest rates rise, the value of the fund can dip. Credit risk comes from investing in lower-rated debt, which carries a small chance of default.
When to invest in an ultra short duration fund?
Consider ultra short-term funds for parking your emergency fund or short-term savings goals. They offer easy access to your cash while potentially providing slightly better returns than traditional savings accounts. They're also suitable for investors seeking low-risk investments to balance out a portfolio with higher risk assets.
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