A Look at Ultra-Short-Term Funds

Ultra-short-term funds have witnessed a spike in demand among retail investors of late.

Ultra-short-term funds are debt funds. These are low-risk funds that invest their money in debt and money market instruments for a timeframe of 3-6 months. As per fund experts, ultra-short-term funds are known to offer returns of above 6.5% or more.

Market regulator Securities and Exchange Board of India (Sebi) guidelines state that ultra-short-term funds invest in instruments, which include treasury bills, corporate bonds, certificates of deposits and government bonds, among others.

Comparatively, these funds are known to offer better returns than a regular savings bank account, besides a high level of liquidity.

As compared to liquid funds, the risks in the case of ultra-short-term funds are often minimum as they are reduced primarily due to the shorter period of such funds. In fact, there is near zero risk of loss if an investor invests for about three months.

Ideally, investors with an investment horizon of 6 months to a year can look forward to parking their money in ultra-short-term funds. The minimum amount of investment in ultra-short-term funds is Rs 500 through the systematic investment plan (SIP) mode and Rs 1,000 in the case lump sum mode.

The returns earned through ultra-short-term funds are taxable as per the debt funds. The capital gains taxation applicable in the case of ultra-short-term funds depends on the duration of the investment. For example, if ultra-short-term funds are held for more than three years, then long-term capital gains (LTCGs) tax is applicable, which is 20% with indexation. In case of fewer than three years, then short-term capital gains (STCGs) is applicable, which are added to income and taxed as per the individual’s slab rate.