What Are Ultra Short Term Mutual Funds

A detailed guide about Ultra Short Term Mutual Funds.
Ultra Short Term Mutual Funds
4 mins
29 February 2024

Ultra short duration Funds belong to the category of debt funds that extend loans to companies over a short period, typically spanning three to six months. Despite being characterised by a relatively low-risk profile attributed to their brief lending duration, these funds position themselves slightly above liquid funds in the risk spectrum. However, it is important to note that when we talk about different investment schemes, ultra short duration Funds maintain one of the lowest risk levels, making them a favourable choice for risk-conscious investors.

What are Ultra Short Term Mutual Funds?

Ultra short duration funds, also known as ultra short term mutual funds, form a category of fixed-income debt fund schemes specialising in investments with a short maturity period, typically spanning three months to six months. Their primary objective is to strike a balance between providing better returns than traditional savings instruments and maintaining lower risk when compared to longer-term debt funds.

These funds invest in a portfolio of debt instruments and money market assets for durations ranging from a week to 18 months, making them an attractive option for investors seeking short-term investment opportunities. For individuals with surplus funds looking to park them for a brief tenure, ultra-short funds offer the advantage of earning dividends.

The investment strategy of ultra short term mutual funds involve allocating funds to debt securities and money market instruments, ensuring that the Macaulay Duration of the fund's portfolio falls between three and six months. These characteristics make such funds particularly appealing to conservative investors with a short investment horizon. Ideally suited for those aiming to achieve specific financial goals within a short timeframe, these funds typically deliver average returns ranging between 7% and 9%.

How to Invest in Ultra Short Duration Funds?

Investing in ultra short duration funds is accessible and can be done online through various platforms like Bajaj Finserv platform. Investors can choose between the lumpsum, or systematic investment plan (SIP) modes based on their financial goals and risk tolerance.

Who Should Invest in Ultra Short Funds?

Ultra short term mutual funds are well-suited for a specific category of investors, primarily those with a conservative risk appetite and a strategic investment horizon. The ideal investor profile for ultra short funds includes individuals who can commit to remaining invested for a minimum period of three months, extending up to one year. It is crucial to understand that despite their conservative nature, ultra-short duration funds do not guarantee capital safety or assured returns.

Investors considering these funds should be comfortable with the potential for daily or weekly volatility in the market. While these funds may exhibit short-term fluctuations, the probability of incurring losses decreases with a longer investment horizon beyond three months. However, it is important to note that if the investment horizon extends to a year or longer, alternative investment options might be more suitable, and investors should carefully evaluate their financial objectives and risk tolerance before opting for ultra-short funds.

Factors to be Considered While Investing

  1. Investment Tenure: Ultra Short Term Mutual Funds are designed for short to intermediate-term investments. Consider aligning your investment tenure with the fund's duration, typically ranging from three months to a year. Assess your financial goals and liquidity needs before choosing the appropriate investment duration.
  2. Low Expense Ratio: Evaluate the expense ratio of the fund, as a lower expense ratio contributes to higher returns for investors. Look for funds with competitive expense ratios, ensuring that the costs associated with managing the fund do not significantly eat into your overall returns.
  3. High Credit Quality: Investors often assume that ultra-short duration funds carry no risk. While these funds indeed feature low interest rate risk, it is essential to recognise the presence of credit risks. Credit risk can lead to a permanent reduction in your investment. To mitigate this risk, prioritise funds with a high credit quality, indicating substantial allocations to AAA/A1+ rated papers. Monthly fund factsheets provide insights into a scheme's credit quality, allowing you to make informed investment decisions.In the pursuit of safety and stability in the underlying assets of ultra-short duration funds, it becomes crucial to assess the credit quality of the securities within the fund's portfolio. This emphasis on high-quality debt instruments helps minimise the potential risk of default, providing investors with greater confidence in the overall safety of their investments.
  4. Do Not Select a Scheme Based on Short-Term Performance: When choosing a scheme, refrain from relying solely on short-term performance indicators. Bond yields are subject to fluctuations due to macro-economic conditions, RBI's monetary policy, exchange rates, and various market-related factors. Forming return expectations based on short-term performance can be misleading. Additionally, a scheme may appear to offer higher returns by assuming greater credit risks. It is crucial to consider multiple factors, including risk assessment, personal risk tolerance, investment horizon, credit quality of the scheme, expense ratio, and more, to make well-informed investment decisions.
  5. Performance Track Record of the fund manager or fund house: Research the track record of the fund manager and the overall reputation of the fund house. A consistent and experienced fund manager is more likely to make sound investment decisions, contributing to the fund's performance. Similarly, opt for funds managed by reputable fund houses known for their ethical practices and transparent operations.

Major Advantages

  1. Lower Interest Rate Risk: Ultra short duration funds invest in debt instruments with relatively short maturities, reducing their sensitivity to interest rate fluctuations. This makes them less susceptible to interest rate risk compared to longer-term debt funds.
  2. Potential for Better Returns Than Traditional Savings Instruments: These funds aim to provide returns higher than traditional savings instruments such as fixed deposits and savings accounts. While they are not entirely risk-free, their short-term nature allows for a potential balance between safety and returns.
  3. Liquidity and Flexibility: Ultra short term funds offer liquidity as investors can typically redeem their units quickly. This feature is beneficial for those who may need access to their funds on short notice or want to capitalise on market opportunities.
  4. Suitability for Short-Term Goals: These funds are well-suited for conservative investors with a short investment horizon of three months to a year. They can be an ideal choice for individuals looking to meet specific financial goals within a relatively short time frame.
  5. Diversification of Portfolio: Ultra short duration funds often diversify their portfolios across a range of debt and money market instruments. This diversification helps mitigate risk and enhance the overall stability of the fund.

Risks Involved While Investing

While considered low risk, ultra short term funds are not entirely risk-free. Interest rate fluctuations and credit risk can impact returns. Investors should carefully assess the credit quality of the fund's portfolio.

Taxation of Ultra Short Term Funds

The tax treatment of Ultra Short Term Funds varies based on the duration of the investment. Ultra-short-term mutual funds allocate more than 65% of their investible assets to debt instruments, categorising them as non-equity investments for tax purposes.

Capital gains from units held for less than three years or 36 months are considered short-term capital gains, attracting taxation at the investor's applicable income tax slab rate.

  • For investments held in ultra short duration schemes for three years or longer, the gains enjoy the benefits of long-term capital gains taxation.
  • If the investment was made on or before March 31, 2023, long-term gains are taxed at 20% with the advantage of indexation benefits.
  • For investments made on or after April 1, 2023, long-term capital gains from ultra short duration funds are taxed according to the investor's income tax slab rate for the relevant financial year, without the benefit of indexation.

How to invest in Ultra Short Duration Funds?

Step 1: Click on EXPLORE FUNDS. You will be redirected to the mutual funds listing page.

Step 2: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list.

Step 3: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating.

Step 4: Get started by entering your mobile number and sign in using the OTP.

Step 5: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video.

Step 6: Enter your bank account details.

Step 7: Upload your signature and provide some additional details to continue.

Step 8: Choose and select the mutual fund that you want to invest in.

Step 9: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’

Step 10: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS.

Step 11: Once your payment is done, the investment will be complete.

Your investment will start reflecting in your portfolio within 2-3 working days.


Ultra short duration mutual funds offer a balanced investment option for those seeking a combination of safety, liquidity, and potential returns. With a focus on short-term debt instruments, these funds cater to conservative investors with a specific time horizon. The advantages, including lower interest rate risk, potential for better returns than traditional savings instruments, and flexibility, make them suitable for various financial objectives. However, it is crucial for investors to consider factors like credit quality, expense ratio, and their own risk tolerance before making investment decisions. While not entirely risk-free, ultra short term funds provide a valuable tool for diversifying portfolios and addressing short-term financial goals. As with any investment, thorough research and understanding individual financial needs are essential for making informed choices in the dynamic landscape of mutual fund investments.

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Frequently Asked Questions

How long should I stay invested in Ultra Short Duration Mutual Funds?

Investors can choose their investment horizon based on financial goals. However, these funds are ideal for short to medium-term investment periods.

Where do Ultra Short Duration Mutual Funds invest?

These funds primarily invest in debt money market instruments with an investment horizon of a few weeks to a few months.

Are Ultra Short Duration Mutual Funds high risk?

While not high-risk, they are not risk-free. Investors should be aware of interest rate and credit risk associated with the fund's portfolio.

What kind of returns can I earn from Ultra Short Duration?

Returns vary, but historically, these funds have provided better returns than traditional savings instruments.

Will ultra-short funds give me assured returns?

No mutual fund can assure returns. Ultra Short Term Funds aim for stability, but returns are subject to market conditions.

Is ultra short term fund safer than FD?

While Ultra Short Term Funds offer liquidity and potential for higher returns, they involve market risks. FDs, being fixed-income instruments, are considered safer but offer lower returns.

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