What are Ultra Short Term Funds - Basics, Factors & Benefits

India offers lot of investment opportunities for individuals who want to grow their wealth and meet their short-term goals. In this regard, Ultra Short-Term funds can be a smart choice for investors who want to put their money in low-risk debt instruments that come with a short investment horizon and can generate moderate returns. Read on to know all about the features of Ultra Short-Term Funds, important benefits, things to know when considering these funds and more.

What are Ultra Short-Term Funds?

Ultra Short-Term Funds can be understood as a category of Debt Mutual Funds which majorly invest in fixed income instruments like Commercial Papers, Treasury Bills, Certificates of Deposit and other money market instruments.

These funds can be a smart choice for investors who are looking to invest money in a market-linked instrument that offers relatively low risk and has a short duration. If you want to generate potentially better returns on your money, then choose from the list of Ultra Short-Term Funds and get easy liquidity and stability.

Basic Features of Ultra Short-Term Funds

1. Investment Horizon

Ultra Short-Term Funds are a good choice for those who want to invest money for a shorter duration in order to meet goals like:

• An upcoming travel plan

• Emergency fund needs

• Business working capital

• Short-term personal goals.

2. Expected Returns

These funds provide returns in the range of <6.5>% to <8.5>%, subject to market conditions and fund performance. Though the returns are not assured, they are often higher than what is offered by traditional saving options or short-term deposits.

3. Risk Profile

Ultra Short-Term Funds are considered low-risk investment instruments as they invest in high credit quality short-term debt instruments. The short duration of the underlying securities helps reduce interest rate risk and keeps Net Asset Value (NAV) volatility to a minimum.

How Ultra Short-Term Funds Operate?

The Fund Manager selects a portfolio comprising short-term debt and money market instruments that mature within a period of three to six months. The duration of the portfolio is maintained within this range to manage interest rate sensitivity effectively.

The main objective is to:

• Preserve capital

• Provide liquidity

• Generate steady income.

The interest income earned from these instruments forms the core component of returns, while capital appreciation, if any, contributes to additional gains.

How to Invest in Ultra Short-Term Funds?

Investors can choose from various platforms and methods to invest in these funds:

• Directly through the Asset Management Company (AMC) website

• Through ICICI Bank’s online platforms, like the iMobile app and Internet Banking.

Before investing, you should ensure that the mandatory KYC (Know Your Customer) compliance is completed. Online platforms allow you to complete the KYC process digitally using PAN and Aadhaar details.

Key Features of Ultra Short-Term Funds

• Short Maturity Period: Investments are made in securities with a maturity period of 3 to 6 months. This limits the exposure to interest rate fluctuations and reduces overall volatility.

• Higher Returns Compared to Other Saving Options: Ultra Short-Term Funds aim to deliver better returns than traditional saving options and some short-term deposits.

• Liquidity: These funds offer high liquidity. Units can usually be redeemed within 1 to 2 business days and some funds also offer instant redemption features up to a certain limit.

• Diversification: The portfolio is diversified across various instruments and issuers, reducing concentration and credit risk.

• Low Cost: Expense ratios in Ultra Short-Term funds are generally low, helping investors retain more of their returns.

Benefits of Investing in Ultra Short-Term Funds

• Capital Preservation with Returns: These funds aim to safeguard the invested principal while offering returns higher than regular saving options, making them ideal for short-term capital parking.

• Suitable for Short-Term Financial Goals: Ultra Short-Term Funds can be used effectively to meet near-term objectives such as utility bill payments, premiums or temporary parking of idle cash.

• Tax Efficiency: Ultra Short-Term Funds are taxed as per your income tax slab, regardless of how long you hold them.

• Accessibility for All Investor Profiles: These funds are suitable for both beginner and experienced investors who seek stable income without high exposure to market volatility.

• Low Volatility: The fund invests for a short duration and follows a careful approach, so its value doesn't change much. This makes it a relatively stable investment option.

Important Considerations Before Investing

• Exit Load: Some funds may impose a small exit load if units are redeemed before a specified duration. Always review the Fund’s terms before investing.

• Interest Rate Sensitivity: Although less sensitive than Long-Term Debt Funds, Ultra Short-Term Funds may still be marginally affected by sudden interest rate changes.

• Credit Quality of Instruments: Choose funds that invest in high-rated instruments (AAA or equivalent) to ensure safety and reduce credit risk.

Conclusion

Ultra Short-Term Funds offer an efficient, low-risk investment avenue for individuals looking to park their funds for a few weeks to a few months. With better returns than regular saving options, high liquidity and minimal volatility, these funds are well-suited for conservative investors or those with short-term financial goals.

They strike a balance between safety and returns and are a smart choice for anyone aiming to optimise idle funds with minimal risk. However, as with any investment, it is important to assess your financial goals, tax implications and risk appetite before investing.