Ultra short-term funds are a category of debt funds that invest in commercial paper, treasury bills, certificate of deposit and corporate paper with average maturity of more than 91 days. Typically , the portfolio invests in a basket of securities that mature in a week to 18 months.
2. How are ultra short-term funds different from liquid funds?
Liquid funds are meant for investors looking to invest for very short time periods -from as low as a day to three months.
They hold a liquid portfolio of debt instruments, and as per regulations, the average maturity of the instruments does not exceed 91 days. Interest accrues on the securities held, and there is no volatility , except in rare circumstances.
Ultra short-term (UST) funds also earn accrual income from the instruments they hold. However, Ultra short-term Funds have longer maturity than liquid funds. They also hold in struments whose prices can fluctuate on a daily basis. Hence, they are slightly volatile when compared to liquid funds over the short term of 1-2 months. The longer average maturity for UST funds means that you need to hold them between 1 month and a year.
3. How can ultra short-term funds be used by investors?
Ultra short-term funds can be held by investors looking to invest in equities, but are unsure of the direction of the market and are a looking for a right opportunity to enter. Vice-versa, investors apprehensive of high equity valuations can book profits there and park the money in ultra short-term funds before they decide what to do next.
They can also be used to park funds needed before you make lump sum payments for buying a large asset such as real estate. Wealth managers advise use of ultra short-term funds for systematic transfer plans (STPs). If you wish to invest a lump sum amount in an equity fund, and do not want to invest at one go, put the money in an ultra short-term fund and give instructions to switch a regular sum every month to your equity fund. Investments in ultra short-term funds earn slightly higher returns than a liquid fund.
4. Is there any exit load in an ultra short-term fund?
Most fund houses do not levy an exit load in such funds. However, at times certain fund houses do levy a small exit load of 0.25 0.5% for a time period of 1 week to 6 months. It is best to take a look at this, before making an investment decision.
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Debt Ultra Short Duration Fund