What are ultra short term mutual funds?

Ultra-short term mutual funds are a category of debt funds designed for investors with a short investment horizon. These funds primarily invest in debt instruments with maturities of up to a few months. The objective is to generate a relatively higher return potential than traditional savings instruments while maintaining a low / low to moderate level of risk. Think of these funds as an instrument that allows you to park your money while earning a bit of returns during its brief layover.

Common types of ultra short-term debt instruments

Treasury bills: Issued by the government, these are short-term debt instruments offering returns.

Certificates of deposit (CDs): Banks and financial institutions issue CDs for fixed periods, offering competitive interest rates.

Money market instruments: These include commercial paper and repurchase agreements, offering high liquidity and low risk.

How should you invest in ultra short mutual funds?

Here's the step-by-step process:

1. Choose your investment route:

Directly with an asset management company (AMC):

Online: Visit the AMC’s official website, complete KYC if required, and register. You can then invest in the direct plan either as a lumpsum or via a Systematic Investment Plan (SIP). Payment options include net banking, UPI, or setting up a bank mandate. Direct plans usually have lower expense ratios due to the absence of distributor commissions.
Offline: Visit the AMC’s branch, fill out the application form, attach a cheque, and submit the required documents including KYC, if applicable.

Through a mutual fund distributor: You typically invest in a regular plan, which includes a distributor commission, resulting in a slightly higher expense ratio.

2. Choose your investment mode:

Lumpsum: For one-time surplus funds, a lump sum investment may be considered.
Systematic investment plan (SIP): For ongoing investments, an SIP enables automated, regular contributions from your bank account.

Before investing, review the scheme’s information document (SID) and key information memorandum (KIM) to understand its objective, risks, and costs.

Who should invest in ultra short term mutual funds?

Having understood the ultra-short term mutual funds definition, let’s see who should invest in these funds.

Risk-averse investors: If the thought of high-risk investments makes you wary, ultra-short term funds offer relative stability and relative peace of mind. The focus on stable, short-term instruments minimises volatility, making them suitable for cautious investors.

Short-term needs: Need a place to park your cash for a few months before your next big purchase or investment? Ultra-short term funds can act as a reliable parking spot, earning you reasonable returns and emphasising on mitigated impact on capital invested while you plan your next move.

Emergency fund: Ultra-short term mutual funds can serve as a readily available emergency fund to meet life’s curveballs, offering quick access to your money if unforeseen circumstances arise.

Key features of ultra-short term mutual funds

Liquidity: These funds offer high liquidity, allowing investors to redeem their units quickly. This makes them a suitable choice for those who may need access to their funds in the short term.

Relatively stable returns: While the returns may not be as high as some riskier options, investors can expect consistent, albeit moderate, returns over the short term.

Limited growth potential: Don't expect spectacular returns with these funds. Their focus on stability translates to modest returns A compound interest calculator can help you visualise the potential growth of your investments over time.

Inflationary erosion: While offering some reasonable returns, the returns might not keep pace with inflation, particularly over longer periods.

Taxation rules of ultra short term mutual funds

All gains are short-term: Any capital gains from ultra short term mutual funds purchased on or after April 1, 2023, are treated as short-term, regardless of how long the units are held.

Taxed as per slab rate: These gains are added to your total income and taxed at your applicable income tax slab rate. For example, those in the 30% bracket will pay 30% (plus cess and surcharge, if applicable).

No indexation benefit: The earlier provision to adjust the purchase cost for inflation is no longer available.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.