Most folks find it difficult to shell out a lump sum amount that is needed for a holiday, especially a holiday to escape from their daily rat race. So how can you put away enough money to spend 2 weeks in Jakarta? How do you go about making sure you don’t pack your bags with your stress, instead of Hawaiian shirts? We can answer this question with exactly 3 words (one of them is hyphenated though) – Ultra Short-Term Funds!
Ultra Short-Term Funds are like the first cousins of Liquid Funds. The difference being, Ultra Short-Term Funds have an investment horizon of anywhere between a week to 18 months. So any extra money you have can be parked in these funds to generate high returns. Which is perfect if you are saving for your escape.
As an investor, you should know the following things about Ultra Short-Term Funds:
Risk
Ultra-short-term debt funds are in a way immune to interest rate risks because of the short maturity of their underlying assets. Although, these funds are riskier than, say, liquid funds.
Return
An investor can expect returns of up to 7-9% from ultra short-term funds If you compare this return rate to the other fund categories. With high risk comes higher The Net Asset Value (NAV) of these fund tends to fall with a rise in the overall interest rates in the economy. Hence, they are suitable for a falling interest rate regime.
Cost
Ultra short-term funds charge a fee to manage your money called an expense ratio. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%. But, taking in to account the returns that these funds provide, recovering the money lost through interest rate fluctuation can be easily covered.
Investment Horizon
Ultra short-term funds earn from the coupon of short-term instruments. The prices of these securities may change on a day-to-day basis and have a relatively long maturity. These are much more volatile than liquid funds.
Financial Goals
You may use these funds for a variety of purposes. If you need to park money for a period of 3 months to a year, then these funds may come in handy. Additionally, you may want these to transfer your funds to a riskier haven like equity funds. Essentially you can treat these funds as your emergency funds.
Tax on Gains
The rate of taxation is based on how long you stay invested in these fund called as the holding period. Any gains that are made under 3 years are classified as Short-Term Capital Gains (STCG) and gains made past 3 years ins classified as Long-Term Capital Gains (LTCG).
STCG from these funds are also added to the investor’s income and taxed according to his income slab. LTCG from these funds is taxed at the rate of 20% after indexation and 10% without the benefit of indexation.
