What are Ultra Short Term Funds?

* This is not an investment advice and aims for information sharing only. 

About: Ultra short term funds are a type of Mutual Fund in the debt funds category that invest in fixed rate and fixed income earning papers with a maturity of up-to 6 months.

Reasons to Invest:

  • For higher return alternatives to FD/RD, savings accounts or liquid funds
  • To invest idle surplus lying in savings account
  • To park money for emergency fund or short term requirements
  • Where liquidity is important and do not want to get locked in a FD
  • Conservative investors wanting to take long term taxation benefit (>3 years in debt funds) 
  • To store money in a debt fund and invest in equity fund through STP

Taxation: Need to pay taxes only when you redeem. Post 3 Years, indexation benefit might make the return from these funds almost tax-free. 

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Risk to return:

  • These funds give you the opportunity or offer a possibility to earn higher returns compared to traditional FDs, savings account or liquid funds.
  • Risk spread across different papers as opposite to single bank Issuer risk in FDs.
  • Negligible credit risk. (as maturity duration is upto 6 months only)
  • Higher risk-adjusted returns than liquid funds.

Read: Things about P.P.F. (Public Provident Fund) that you might not know yet and are important.

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