Ultra short duration mutual funds invest in debt securities having a maturity of three to six months. These funds are ideal for investors looking for returns than traditional savings options with relatively low risk. However, before delving into this investment opportunity, it’s important to grasp its complexities, which we will cover in this article.
Top 5 Things to Know About Ultra Short Duration Debt Funds
Let’s look into the five things to know about these funds:
1. Investment Timeframe and Goals
These funds target investors with a medium-term investment horizon ranging from months to a couple of years. These funds generally invest in fixed-income assets such as treasury bills, commercial paper, and short-term bonds maturing in three months to six months. Due to the possibility of higher returns, investors frequently utilize these funds as a short-term liquidity option.
2. Tax Efficiency and Liquidity
In terms of tax efficiency and liquidity, ultra short duration debt funds benefit from tax treatment compared to fixed deposits. Investments held for more than three years qualify for long-term capital gains tax of 20% (with indexation) or 10% (without the benefit of indexation). Short-term capital gains tax for investments held for less than three years is on the basis of the tax bracket of investors.
3. Expense Ratio
Expense ratios are key in determining the returns of short-duration debt funds. It’s important for investors to carefully review the expense ratio of funds they plan to invest in, as lower expenses can lead to higher returns. These funds often have a lower expense ratio compared to other equity funds. It is typically below 0.50%.
4. Return Expectations
When it comes to investment return expectations, these funds offer better returns than other instruments like FDs and savings accounts. The average category rate for these funds is around 7% to 8%.
The success of short-term debt funds is influenced by factors such as current interest rates, credit spreads, and the fund manager’s ability to navigate market circumstances. Investors should expect occasional return variations. However, these funds are less volatile than equity investments.
5. Risk Level and Stability
Even though ultra short-duration debt funds are safer than stocks, they still have some risks. The main ones come from changes in interest rates and the credit quality of the underlying investments.
Since these funds invest in shorter-term securities, they don’t get as affected by interest rate changes as much as longer-duration debt funds but that does not completely eliminate its impact. Also, investors need to check the credit quality of the underlying securities to mitigate default risks.
Final Words
Ultra short duration mutual funds provide an investment option for individuals seeking a balance between risk and return in fixed income investments. By grasping the nuances mentioned above, investors can make informed decisions that align with their investment goals and risk tolerance levels. If you are looking forward to investing in the best debt mutual funds, consider Dhan, India’s one of the leading online investment platforms.
