Best Ultra Short Duration Funds Sorted by Last 3 Year Returns
About Ultra Short Duration Mutual Funds
Ultra short-term funds are similar to liquid funds; however, these offer higher liquidity than other classes of funds. Also known as ultra-short-duration funds, these are debt funds whose underlying securities have a maturity of 3 to 6 months. These funds are relatively riskier than liquid funds but fall under one of the lowest-risk categories of the mutual fund’s umbrella.
Since these are shorter-duration funds, the returns are lower compared to longer-duration mutual funds. When you invest in ultra short-term funds, you are charged a fee in the form of an expense ratio. This is towards managing your money. As per SEBI, the upper limit of the expense ratio is 1.05%.
How Do Ultra Short Funds Work?
Ultra-short funds or ultra-short duration funds are open-ended mutual funds that invest in debt instruments. These funds have a typical Macaulay duration of 3 to 6 months. Simply put, these funds invest in debt securities with maturity periods of 3-6 months. Ultra short funds mainly invest in fixed-income instruments like commercial papers, certificates of deposit, treasury bills, and money market instruments.
Ultra short-term funds, as they work for short periods, have liquidity. Furthermore, minimal maturity periods make these funds less influenced by interest rate shifts in the market. The fund works on the premise that it has the potential to provide higher growth than long-duration debt funds in a rising interest rate regime. These funds believe in delivering returns by holding securities until their maturities. The returns are calculated according to the rise or fall in the NAV or the Net Asset Value of the fund. The NAV of the fund tends to rise or fall with changes in interest rates.
Features of Ultra Short Duration Mutual Funds
- Ultra short-term funds are debt funds. Hence, these funds are exposed to three types of risks – credit risk, interest rate risk, and liquidity risk.
- These funds are relatively less risky compared to equity and hybrid funds. As such, their returns are also lower than most other funds classes.
- Ultra short-term funds have an expense ratio, which is a fee charged by the fund manager to manage your money. To optimise your returns, you may look for schemes with a lower expense ratio but ensure to evaluate other factors like risk, too.
- Ultra short-term funds can be considered for short-term investment needs and Systematic Transfer Plans (STP).
- As the returns given by ultra short-term funds are around 7-9%, you can consider these as alternatives to bank accounts and deposits.
Advantages of Investing in Ultra Short-Term Funds
Ultra short-term funds are ideal investments for investors looking to park their surplus capital for a short period (weeks to a few months).
Unlike fixed deposits and other bank deposits, ultra-short-term funds have higher liquidity. You can exit the fund anytime you wish.
Typically, ultra short-term funds don’t have an exit load. This means you don’t have to pay any charges when redeeming your fund units.
If you invest in ultra short-term funds for less than 3 months, your losses arising from a change in interest rates would be almost nil.
In a low-interest rate regime, ultra-short-term funds can give higher returns than bank deposits.
Some fund houses allow you to systematically transfer a regular amount into equity mutual funds offered by them.
Risks Involved in Ultra Short-Term Funds
Since an ultra short-term fund is a debt fund, it has three types of risks:
- Credit risk: This is the risk of default by the issuer of the underlying securities.
- Interest rate risk: This is the impact of an increase or decrease in the interest rates on the fund’s value.
- Liquidity risk: This is the risk associated with the fund house not having ample liquidity to honour the redemption requests of investors.
You can minimise your credit risk by studying the portfolio of the ultra short-term fund to ensure that the scheme has invested in high-rated underlying debt securities. You can assess the fund manager to get an idea of their past performance during varying interest rate cycles. If the fund has performed optimally even during interest rate fluctuations, then the manager has done well.
Factors To Consider Before Investing in Ultra Short Mutual Funds
It is important to consider certain variables before you go ahead and invest in ultra-short mutual funds:
- Thinking of your individual investment goals is necessary when considering ultra-short-duration funds. These funds are considered by those investors who want liquidity and short-term investment, perhaps to park excess funds or make some returns to build an emergency fund. In case you wish to invest in a short-duration fund that offers higher returns than conventional bank deposits, you may consider an ultra-short fund.
- Investors should also consider their investment horizon. As ultra-short-term funds have maturity periods that are slightly higher than liquid funds, you may think of these for more substantial returns.
- Think of the returns you stand to potentially gain. Debt funds may offer higher returns than liquid funds, but these may not be assured. As such funds have an inverse relationship with the movements of interest rates, the NAV falls with an increase in interest rates and vice versa.
- Relative to other debt funds, ultra-short funds have interest rate risks on the lower side. This is mainly due to short maturity periods. Nonetheless, you must also consider that there may be credit risk involved depending on the investment strategy of the fund house.
- As is the case with all mutual funds, there are some costs to be borne with ultra-short funds. Expense ratios are charged with a maximum cut-off, so you may consider funds with long maturities and low expense ratios to maximise returns.
- You must consider the taxation on any gains from ultra-short mutual funds. Gains may be taxed according to your investment duration, added to your income, and taxed as per your income slab rate (for debt mutual funds).
Who Should Invest in Ultra Short-Term Mutual Funds?
- Ultra short-term funds are most suited for investors who are looking to park their funds and have quick access to them when required.
- These are also sought-after by investors looking for alternatives to bank accounts and deposits.
- A smart way to use ultra short-term funds to your advantage is to invest a lumpsum surplus in such funds and use portions of it to buy the dip in your favourite stocks.
- Some fund houses also offer a Systematic Transfer Plan (STP) facility by which you can instruct them to transfer a regular sum of money into an equity fund of the same AMC.
Taxability of Ultra-Short-Term Funds
When you redeem ultra-short-term mutual fund units, you may earn capital gains. Such gains can attract Short-term Capital Gain Tax (STCG) or Long-term Capital Gain Tax (LTCG) depending on the holding period (how long you hold your investment in the fund).
Capital gains earned on selling the units within 3 years of the holding period are called STCG; those earned over 3 years or more are known as LTCG. While STCG from such funds is added to your income and taxed as per the applicable income tax slab, LTCG is taxed at the rate of 20% after indexation.
Dividend taxation – Dividends earned on ultra short-term funds are added to the investor’s taxable income and taxed at the rate as per the income tax slab. There is also a 10% TDS on dividend amounts exceeding ₹5,000 in a financial year.
How To Invest in Ultra-Short Funds?
Investing in the ultra-short Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine an ultra-short fund that suits your needs and risk profile. You can learn more about each ultra-short fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the ultra-short fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Ultra Short-Term Mutual Funds
| Fund Name | AUM ( in ₹ crores) | Expense Ratio (%) | Absolute Returns – 3M (%) | Absolute Returns – 6M (%) |
| Aditya Birla SL Savings Fund | 16,348.76 | 0.34 | 1.97 | 3.95 |
| Nippon India Ultra Short Duration Fund | 7,695.11 | 0.38 | 1.88 | 3.87 |
| Tata Ultra Short Term Fund | 3,961.05 | 0.29 | 1.88 | 3.83 |
| Mirae Asset Ultra Short Duration Fund | 1,616.27 | 0.22 | 1.85 | 3.83 |
| Invesco India Ultra Short Duration Fund | 1,423.75 | 0.24 | 1.84 | 3.78 |
Note: The above-mentioned top funds are for informational purposes only, and are not recommendations. The funds are based on 3 months’ absolute returns as of January 8, 2025, which are subject to change frequently. Check out real-time data on Angel One.
Aditya Birla SL Savings Fund
The Aditya Birla SL Savings Fund, with an AUM of ₹16,348.76 crore, offers stable returns through short-duration investments. It has a competitive expense ratio of 0.34% and delivered absolute returns of 1.97% over 3 months and 3.95% over 6 months. Managed by Aditya Birla Sun Life AMC, a joint venture of Aditya Birla Group and Sun Life Financial, the fund leverages extensive market expertise. It is ideal for investors seeking liquidity and steady income over short time horizons.
Nippon India Ultra Short Duration Fund
The Nippon India Ultra Short Duration Fund, managing ₹7,695.11 crore in assets, provides reliable short-term investment options. With an expense ratio of 0.38%, it recorded absolute returns of 1.88% in 3 months and 3.87% in 6 months. Operated by Nippon India Mutual Fund, a leader with ₹4,15,316.08 crore in AUM, the fund focuses on generating steady income with low risk, making it suitable for conservative investors.
Tata Ultra Short Term Fund
The Tata Ultra Short Term Fund, with an AUM of ₹3,961.05 crore, offers consistent returns of 1.88% over 3 months and 3.83% over 6 months. It has an expense ratio of 0.29%, reflecting its cost-efficiency. Managed by Tata Asset Management, which has over 25 years of experience, the fund provides a secure and liquid investment avenue for individuals seeking stability and moderate returns over shorter durations.
Mirae Asset Ultra Short Duration Fund
The Mirae Asset Ultra Short Duration Fund, handling ₹1,616.27 crore in assets, provides competitive returns with absolute gains of 1.85% in 3 months and 3.83% in 6 months. Its low expense ratio of 0.22% enhances cost-effectiveness. Managed by Mirae Asset Global Investments, a key player in the Asian financial markets, the fund is tailored for investors seeking short-term returns with high liquidity and low risk.
Invesco India Ultra Short Duration Fund
The Invesco India Ultra Short Duration Fund, managing ₹1,423.75 crore in assets, is a reliable choice for short-term investments. It offers absolute returns of 1.84% over 3 months and 3.78% over 6 months, with a low expense ratio of 0.24%. Operated by Invesco, a global investment firm with a presence in 25 countries, the fund is ideal for investors seeking steady income and enhanced liquidity over shorter periods.
Mutual Funds Calculators
Ultra Short Duration Funds FAQs
Are ultra short-term mutual funds high risk?
Ultra-short mutual funds are similar to liquid funds. These invest in short-term debt securities with maturity ranging from 3 to 6 months. Hence, these are low-risk funds compared to equity mutual funds. You can check the risk level of each fund in the Angel One app or https://www.angelone.in/mutual-funds under the Mutual Funds section.
Should I invest in ultra-short-term mutual funds?
What are the expected returns of ultra-short-term mutual funds?
What are the risks involved in investing in ultra-short-duration funds?
Are ultra short-duration funds taxable?
How much money should I invest in ultra short-term funds?
