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Invest in Top Ultra Short Term Mutual Funds In 2022: High Return Mutual Funds In India

Read about the best Ultra short term funds to invest in. Also, check out the returns detail, taxation details, advantages and risks associated in one go.
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Some investors have a conservative risk profile, while some would have received a lumpsum amount and would like to park it somewhere for the short-term until they figure out where to invest it in the long term. For both these groups, ultra-short term mutual funds are a good investment option. This article focuses on how to invest in top ultra short term mutual funds in 2022.

What are ultra short term funds?

An ultra-short term fund is an open-ended mutual fund scheme that invests its money in debt and money market instruments such that the Macaulay Duration of the portfolio is between three and six months.

Macaulay duration measures how long it will take for an investor to get back the amount they invested in fixed income security (for example, bond) with the cash flows earned from that security. The cash flows from a bond include the regular interest repayments and the principal repayment on maturity.

Returns given by ultra-short term mutual funds

Let us look at the returns given by some of the best ultra short duration funds.

Scheme name(Direct Plan - Growth option)AUM (Rs. crores)1-year(Absolute returns)3-years(CAGR)5-years (CAGR)
PGIM India Ultra Short Duration Fund6693.84%7.64%7.64%
ICICI Prudential Ultra Short Term Fund11,8354.62%6.71%7.18%
Aditya Birla Sun Life Savings Fund15,5414.38%6.40%6.88%
Kotak Savings Fund11,7203.87%5.86%6.52%
Invesco India Ultra Short Term Fund8593.85%5.66%6.47%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/ultra-short-duration-fund.html)

Who should invest in ultra-short-term mutual funds?

An investor with a conservative risk profile may consider investing in an ultra-short term mutual fund. Also, investors looking to invest or park their money for the shorter term of three months to one year may consider investing in ultra-short term mutual funds. So, if you have received a lumpsum amount and it will take you a few months to figure out how to invest it for the long term, you may consider parking it in an ultra-short term mutual fund.

Taxation of ultra-short term funds

Ultra-short term mutual funds are a subcategory under the broader category of debt mutual funds. Hence, the taxation of ultra-short term mutual funds is similar to that of debt funds. The taxation of ultra-short mutual funds is as follows:

Short-term capital gains (STCG) tax

  • The capital gain will be categorised as short-term capital gain if you redeem your ultra-short term mutual fund units within 36 months of purchase (STCG). The short-term capital gain (STCG) will be added to your total income and taxed according to your income tax bracket.

Long-term capital gains (LTCG) tax

  • The capital gain will be categorised as long-term capital gain if you redeem your ultra-short term mutual fund units after 36 months of purchase (LTCG). The long-term capital gain (LTCG) tax will be imposed at a rate of 20% with indexation and 10% without indexation.

Risks involved in ultra-short term mutual funds

Ultra-short term mutual funds invest in fixed income securities such as money market instruments and other debt instruments. All fixed income securities carry interest rate risk depending on Macaulay Duration. The lower the Macaulay Duration, the lower the interest rate risk. 

In the case of ultra-short term mutual funds, the Macaulay Duration is in the range of three to six months. So, ultra-short term mutual fund schemes are exposed to interest rate risk. However, as the Macaulay Duration of ultra-short term mutual funds is low, the interest rate risk involved is low.

Ultra-short term mutual funds invest in fixed income securities such as treasury bills issued by the central Government, certificate of deposit (CD) issued by banks, commercial paper (CP) issued by corporates, repo agreements, etc. All these fixed-income securities have high credit ratings. Hence, the credit risk of default is very low in these instruments. 

However, these instruments deliver low returns. So, returns from ultra-short term mutual funds may or may not be able to beat inflation. If they are not able to beat inflation, then the real returns will be negative from these mutual funds.

Return potential from ultra-short term mutual funds

The table in the above section shows the best ultra-short term mutual funds that have delivered 6.5 to 7.5% CAGR returns in the last five years. These are low to moderate returns. Ultra-short term mutual funds have the potential to generate higher returns than a savings bank account.

So, have you received a lumpsum amount, and it will take you a few months to decide how to invest it for the long term? You have the option of investing that amount in an ultra-short term fund or keeping it in your savings bank account. Most bank savings accounts will give you a return in the range of 2 to 3% p.a. However; an ultra-short term fund has the potential to give you one-year returns in the range of 3.5 to 5% p.a. during the same period.

Advantages of investing in ultra-short term mutual funds

Some of the advantages of investing in ultra-short term mutual funds include:

Good credit quality

  • Most ultra-short term mutual funds invest in debt instruments with either the highest or one of the highest credit quality

Low expense ratio

  • Generally, ultra-short term mutual funds have a lower expense ratio than many other debt funds and equity funds. However, you should still compare the expense ratios of different ultra-short term mutual funds and choose one with a low expense ratio.

Low-interest rate risk

  • In the case of debt funds, the lower the Macaulay Duration of the portfolio, the lower the interest rate risk, and vice versa. Since the Macaulay Duration of an ultra-short term mutual fund scheme is between three to six months, the interest rate risk is lower than other debt funds with a higher Macaulay Duration.

Reasons for investing in ultra-short term mutual funds

There are two major reasons for any individual to invest in ultra-short term mutual funds:

  1. The Individual has a conservative risk profile: You may consider investing in an ultra-short term mutual fund if you have a conservative risk profile. These funds are relatively safer than many other debt funds. You will have the safety of capital and liquidity by investing in an ultra-short term mutual fund. However, please remember that the returns will be low to moderate. The returns may or may not be able to beat inflation.
  2. The Individual has received a lumpsum and wants to park it for the short term: If you have received a lump sum amount and are looking to park it somewhere for the short term, you may consider parking that lumpsum in an ultra-short term mutual fund. Once you figure out where to invest that lumpsum for the long-term, you may redeem your ultra-short term mutual fund units and proceed with your long-term investment plan.

Conclusion

Ultra-short term mutual funds are a good financial product for investors with a conservative risk profile. If your priority is the safety of capital and liquidity over returns, you may consider investing in ultra-short term mutual funds.

To start investing in ultra-short term mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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