When Should You Consider Investing in Ultra Short Duration Funds?

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Many conservative investors lean towards debt-oriented investments. For example, ultra short duration funds, previously referred to as Ultra short term funds, are designed for investors who seek relatively short-term investment opportunities in line with investment horizons of up to 12 months.

In this article, we will learn the concept of ultra short duration funds, their objectives, features, suitability for different risk appetites, return expectations, and considerations for investors looking to optimise their portfolios.

  • Table of contents
  1. Ultra short duration funds
  2. When to Invest in ultra short term funds?
  3. FAQs

Ultra short duration funds:

Aligning objectives with features, risk appetite, return expectations, liquidity

Ultra short duration funds are a category of mutual funds that primarily invest in fixed-income securities with relatively short maturities, typically ranging from a few months to one year. These funds aim to generate a higher return potential than traditional savings accounts while maintaining a relatively low level of interest rate risk.

Here's a checklist to assess if these funds are suitable for you:

Objective alignment

Ultra short term funds seek to strike a balance between mitigated impact on capital invested, liquidity, and income generation. They can be considered by investors with a short to medium-term investment horizon who are willing to accept slightly higher risks in pursuit of potentially higher returns compared to traditional cash equivalents.

Risk appetite

While ultra short duration funds are relatively conservative compared to longer-term bond funds, they still carry some degree of credit risk and interest rate risk. Investors should assess their risk tolerance and investment objectives carefully before allocating funds to these instruments.

Return expectations

Ultra short term funds typically offer higher yields than savings accounts, making them feasible for investors seeking modest income generation with low impact of volatility. They do not offer guaranteed returns. Also, it’s essential to temper return expectations and recognise that these funds prioritise relative stability and liquidity over aggressive growth.


One of the primary advantages of ultra short term funds is their high degree of liquidity, which can provide flexibility for investors to access their funds as needed without incurring significant penalties. However, these funds may face some liquidity challenges during certain market conditions.

When to Invest in ultra short term funds?

Short-term cash management: Ultra short term funds can be deployed for parking excess cash reserves or emergency funds for short periods. These funds offer a relatively higher return potential than traditional savings accounts while maintaining liquidity and relative stability, making them suitable for short-term cash management needs.

Mitigating interest rate risk: These funds invest in short-term securities with relatively low durations, minimising the impact of interest rate fluctuations on portfolio returns compared to longer-duration bond funds. However, they are more vulnerable to interest rate changes compared to liquid funds.

Relatively stable income potential: Investors seeking a potentially stable income stream with relatively low volatility may consider investing in ultra short term funds. These funds receive regular interest payments from their underlying fixed-income securities, thereby offering a predictable source of returns for investors with income-oriented investment objectives.

Ultra short term funds can be considered by investors who want a mix of relative stability, easy access to their money, and the chance for potentially steady income. By picking ultra short term funds that match their goals, risk tolerance, and horizon, investors can use ultra short term funds to effectively manage their money in the short to medium term.


Do ultra short term funds offer assured returns?
No, ultra short term funds do not offer assured returns. While these funds invest in relatively low-risk fixed-income securities, they are subject to market fluctuations and carry some degree of credit risk and interest rate risk. Returns are not guaranteed and may vary based on prevailing market conditions.

What is the lock-in period for ultra-short-term mutual funds?
Ultra short term funds typically do not have a lock-in period. Investors can buy or sell fund units at the end of each trading day at the prevailing NAV.

How to invest in ultra short term funds?
Investors can invest in ultra short term funds through various channels, including online platforms, mutual fund distributors, or directly through the fund house. They can initiate investments by completing the necessary documentation, KYC requirements, and selecting the desired fund based on their investment objectives and risk tolerance.

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.