FD vs. ultra-short-duration fund: What’s suitable for you?

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Fixed deposits (FDs) are a popular option for those looking to park money in a safe instrument with guaranteed returns. Another investment avenue that offers similar and sometimes potentially higher returns – though without guarantees – is ultra-short-duration funds.

There are some key differences between ultra-short-duration funds vs FDs when it comes to return potential, liquidity, and convenience. This article compares the structure, risks and returns, of FDs and ultra-short-duration funds to help you decide which is better suited for your needs.

  • Table of contents
  1. FD vs ultra-short-duration fund
  2. Conclusion
  3. FAQs

FD vs Ultra-Short-Duration Fund


FDs are deposit accounts offered by banks and non-banking finance companies where you deposit a lumpsum amount for a fixed tenure, which can range from 7 days to 10 years, to earn a predetermined rate of interest over a fixed tenure.

Ultra-short-duration funds are a category of debt mutual funds that invest in short-term fixed-income securities such as treasury bills, certificates of deposit, commercial paper, etc. with a Macaulay duration of between 3-6 months.


FD returns are based on the prevailing interest rates in the economy and the duration of your investment. As of April 2024, 1-year FD rates of major banks are around 6%. The returns are guaranteed, and bank deposits are one of the safest investment avenues.

In comparison, the one-year returns on ultra-short-duration funds are not fixed but have ranged roughly between 3% and 7% in the last five years.


FDs from reputed banks don't carry high risk. Returns are fixed and guaranteed if you hold the FD till maturity. Even if the bank goes bust, deposits up to Rs. 5 lakh (per bank per investor) are insured.

Debt funds, on the other hand, carry market risk linked to the creditworthiness of the debt issuer and interest rate fluctuations. However, ultra-short-duration funds tend to be relatively stable because of the short duration of their underlying securities. Also, credit risk is diversified across several issuers and securities, and fund managers seek to invest in high-quality instruments.


FD tenure can range from 7 days to 10 years. Ultra-short-duration debt funds do not have a fixed tenure but are suitable for investments of a few months to a year.


FDs offer medium liquidity. You can't add or withdraw funds whenever you wish to, and you may incur a penalty if you prematurely break your FD. Debt funds offer relatively high liquidity as you can add funds or redeem units without penalties except in some instances where schemes may have an exit load. This makes them ideal for parking surplus funds for a short period.

FDs and ultra-short-duration funds both have their pros and cons. FDs are suitable if you want guaranteed returns and do not need liquidity. Debt funds provide high liquidity but entail risk and may underperform in volatile markets. Assess your investment goals, time horizon, and risk tolerance before deciding between the two. Maintaining a balance between the two in your portfolio can help optimize the stability, return potential, and liquidity.


What is the ideal tenure for parking funds in ultra-short-duration debt funds?
The ideal investment horizon for ultra-short-duration debt funds is a few months to a year. Given their short portfolio duration, they are better suited for temporary parking of surplus funds or to build a corpus for a near-term goal.

How frequently should one track the performance of ultra-short-duration debt funds?
Checking the performance of an ultra-short-duration fund once every quarter should be sufficient given their relatively low volatility.

Is there any guarantee for returns from ultra-short-duration debt funds?
No, the returns from ultra-short-duration debt funds are not guaranteed and can fluctuate depending on market conditions. However, given their low duration, the fluctuations are typically not very high, making them relatively stable.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as an 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.