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An Ultra Short-Term Fund is a type of debt mutual fund that invests in fixed-income securities with short maturities, typically ranging from 3 to 6 months. These funds offer higher liquidity and moderate returns compared to savings accounts or fixed deposits.
Merits of Ultra Short-Term Funds
✅ Higher Returns than Savings Accounts – Offers better returns than traditional bank deposits.
✅ Low Interest Rate Risk – Due to short duration, they are less sensitive to interest rate fluctuations.
✅ Liquidity – Can be redeemed quickly, making it suitable for short-term parking of funds.
✅ Diversification – Invests in multiple debt instruments, reducing risk.
✅ Tax Efficiency – Long-term capital gains (if held for more than 3 years) are taxed at 20% with indexation benefits.
Demerits of Ultra Short-Term Funds
❌ Credit Risk – If the issuer defaults, it may impact returns.
❌ Lower Returns than Equity or Long-Term Debt Funds – Limited potential for high returns.
❌ Market Volatility – Though minimal, it can still be affected by liquidity conditions and credit downgrades.
❌ Expense Ratio – Management fees can slightly reduce net returns.
Types of Papers Held in the Portfolio
Certificates of Deposit (CDs) – Issued by banks for short-term funding.
Commercial Papers (CPs) – Issued by corporates for working capital needs.
Treasury Bills (T-Bills) – Short-term government securities.
Corporate Bonds – Short-duration bonds with high credit ratings.
Repo and Reverse Repo Instruments – Short-term borrowing/lending instruments in the money market.
Holding Period of Instruments
Generally, 3 to 6 months maturity.
Some instruments may be rolled over or reinvested based on market conditions.
The fund manager actively manages duration to optimize risk-return.
