Best Ultra Short Term Funds: India’s Top 10 Performing Ultra Short Term Mutual Funds to Invest in 2022

Updated on: Jan 3rd, 2022


7 min read

Best Ultra-short duration funds are class debt mutual funds that invest in fixed-income securities that mature in a period of three to six months. We have covered the following in this article on best ultra-short funds:

Introduction to Best Ultra Shot Funds

Ultra-short term funds are debt funds whose asset allocation is predominantly made towards fixed-income securities such as treasury bills, government bonds, corporate bonds, and so on, in such a way that the Macaulay duration of the fund plan is between three to six months. The associated risks are mitigated to a great extent by the short maturity period of the underlying securities. These funds are open-ended and are capable of providing much higher returns than a regular savings bank account while offering higher degrees of liquidity.

Top 10 Ultra Short Funds

The table below shows the top-performing ultra-short funds based on the past 3-year and 5-year returns:

Mutual fund 5 Yr. Returns 3 Yr. Returns Min. Investment Rating

Who Should Invest in Ultra Short Funds?

Investing in ultra short-term funds is suitable for those with an investment horizon of shorter than one year. Since these funds carry lower levels of risk, it makes it suitable for risk-averse investors. These funds are known to provide much higher returns than a regular savings account. First-time mutual fund investors can get started with ultra short-term funds. Like other mutual funds, investments made into these funds are not safe. Ultra short-term funds are also influenced by credit risk, and the investors must essentially be aware of this. These funds are tailor-made for individuals willing to tap into the opportunities provided by low yields and interest rate fluctuations.

Taxability of Ultra Short Funds

Since ultra short-term funds are a class of debt funds, they are necessarily taxed like any other debt fund scheme. The dividends offered by these funds are taxed classically. They are added to investors’ overall income and taxed at their respective income tax slab rates. The short-term capital gains, realised on selling fund units within a holding period of three years, are added to the investors’ overall income and taxed at their respective slab rates. The long-term capital gains, realised on redeeming fund units after a holding period of three years, are taxed at a rate of 20% after indexation.

Risks Associated With Ultra Short Funds

The following risks influence ultra short-term funds:

a. Credit risk Credit is the possibility of the issuer of the underlying securities not standing by their obligation to pay interest or the coupon and repayment of principal invested upon maturity.

b. Liquidity risk Liquidity risk is the possibility of the fund manager selling the underlying assets by taking a big hit. This might happen when the underlying assets are not in demand in the market.

c. Interest rate risk Interest rate risk is the possibility of the depreciation in the value of the underlying fixed-income instruments due to the movements in the interest rate in the economy.

Things an Investor Should Consider Before investing in Ultra Short funds

Investors should consider the following while investing in ultra short-term funds:

a. Risk Ultra short-term debt funds are not safe. However, the short-term maturity period of the underlying securities makes these funds somewhat immune to the associated risks. Investors should be aware of the extent of the impact that interest rate fluctuations may have on the fund’s performance.
b. Return The returns are not guaranteed as they depend entirely on the performance of the underlying assets. That being said, these funds have a track record of providing investors with returns in the range of 7% to 9%, which is almost twice the returns offered by bank fixed deposits.
c. Investment Horizon If you have an investment horizon of shorter than one year, then ultra short-term funds are an ideal option for you. One may also consider these funds as an option to park their surplus funds.

Advantages of Best Ultra Short Mutual Funds

Ultra short-term funds come with the following advantages:

  • You get the potential to earn higher returns than bank deposits.
  • These funds are an excellent option to park surplus funds.
  • Ideal investment option for those with an investment horizon shorter than one year.
  • These funds carry lower risk levels.

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Quick Summary

Ultra-short duration funds are class debt mutual funds investing in fixed-income securities with maturity between three to six months. They provide higher returns than savings accounts with low risk for short-term investors. Considerations include credit, liquidity, and interest rate risks. Advantages include potential for higher returns, ideal for short-term investment horizon, and lower risk levels.

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