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​Ultra Short-Term Funds - All you need to know about Ultra Short Duration Funds

What do you usually do when you receive your annual bonus? Keep it aside for some future goal, preserve it in traditional investment instruments, or use it for pre-payment of some loan, right? What if there was an option to park this money for a short term of three to six months? And what if you could earn returns from such an investment? Sounds fantastic, doesn’t it? Well, well. Here is a parking spot for your surplus funds that could be both easy to access and beneficial. Ultra-Short-Term Funds/ Ultra Short Duration Funds.

What are Ultra Short Duration Funds?

Ultra-Short-Term Fund is a type of debt mutual fund that invests in securities with a maturity of three to six months. These funds are open-ended debt schemes, meaning investors can invest and withdraw their funds in these schemes any time they want. This is unlike close-ended schemes where investors can enter or exit the scheme only during specific periods. Therefore, transacting in ultra-short-term funds can be easy and convenient.

Another reason why accessing funds from Ultra Short Duration Fund investment can be easy is because these schemes aim to invest in highly liquid debt instruments such as treasury bills, money market instruments, commercial papers, certificates of deposits, etc. Now that you have understood the basics of ultra-short-term debt funds, let’s look at how these funds work.

How do Ultra Short-term Mutual Funds work?

Like all mutual funds in India, Ultra short-term mutual funds are regulated and monitored by the Securities and Exchange Board of India (SEBI). The rules, regulations and guidelines set by SEBI ensure transparency in investment and facilitate the preservation of investors’ interests.

As per SEBI rules, these schemes primarily invest in debt securities with a maturity of 3-6 months. Due to this low maturity, investments in ultra-short-term funds can be considered low-risk. Another reason for low-risk investment is that the underlying securities of these funds are comparatively less volatile than investing in stocks or equities of private companies.

The returns on investment in Ultra Short Term Funds schemes are calculated based on the fund's change in the Net Asset Value (NAV), which fluctuates based on prevailing interest rates in the market. However, returns generated by these funds can be predictable as the capital is exposed to instruments with fixed maturity.

Difference between the liquid fund and ultra-short duration fund

Ultra short-term funds are debt schemes investing in securities having 3-6 months’ maturity. Liquid funds, on the other hand, aim to invest in securities with even shorter maturities. As the name suggests, the primary objective of liquid funds is to provide liquidity, i.e. easy access to funds to investors. Therefore, liquid mutual funds typically invest in debt securities with a maturity of up to 91 days. Apart from the maturity period of underlying securities, there’s no major difference between the liquid fund and ultra-short duration fund. The taxation rules are the same for both debt schemes. Investors should pick the fund which suits their investment objective and horizon.

Why should you invest in ultra-short-duration funds?

Easy liquidity

Unlike traditional investment methods, where there’s a penalty for premature withdrawal of funds, ultra-short duration mutual funds offer higher and easier liquidity when compared to them. These funds do not carry any lock-in period and aim to offer modest returns in the short period.

Low-risk investment

As mentioned above, ultra-short-term funds invest in debt securities such as treasury bills, government securities, commercial papers, etc. which are relatively stable instruments and comparatively less volatile as compared to equity. Moreover, a lower holding period of the securities reduces your exposure to other risks such as interest rate risk, duration risk or credit risk.

Possibility of better returns

Although returns generated by ultra-short-term mutual funds are not guaranteed, they endure to offer relatively better and more predictable returns than traditional investment instruments.

Taxation of Ultra-short duration debt funds

As ultra-short-duration funds are debt mutual funds, the taxation rules of debt categories are applied to these schemes. This means if you hold the investment in an ultra short-term fund up to 36 months, the returns earned on the investment will be considered as short-term capital gains and added to your taxable income. These gains will be thus taxed as per your respective tax slab rate.

If your ultra short-term debt fund investment is held for more than 36 months, the gains will be considered long-term capital gains. Such gains are taxed at 20% after indexation for all debt mutual funds. Therefore, long-term investment in ultra-short-term schemes can help you avail of indexation benefits .

However, w.e.f 1 April 2023, The Finance Bill 2023 has removed indexation benefit on long term capital gain for the investment made in specified mutual fund schemes. In such case, any capital gains would be considered as short term in nature and taxed as per applicable tax rate slab of the investor irrespective of the holding period. This provision is applicable only for any fresh investments made on or after 1 April 2023.

“Specified Mutual Fund” means a Mutual Fund scheme which does not invest more than 35% in equity shares of domestic companies.

Who should invest in ultra-short-duration funds?

Investors who wish to park a lump sum for a short duration of a few months or those looking to invest money in debt instrument can consider investing in ultra-short-term mutual funds. These schemes are suitable for investors with smaller investment horizon.

Ultra-short-term funds are also suitable for investors opting for STP (Systematic transfer plan) facility. STP allows you to transfer a certain amount from one mutual fund scheme to another.

For example, if you have a lump sum amount to invest for the long term, instead of putting it in an equity fund in one go, you can invest the sum in an ultra-short-term fund and schedule STP which will transfer a fixed amount periodically to the equity scheme of your choice. This way, you can make the most of rupee cost averaging and earn returns on investment in both debt and equity schemes.

Factors to consider while investing in ultra-short-duration funds

Risk associated

One of the basic concepts in debt mutual fund investing is that the longer the holding period of underlying securities, the higher the chances of investment getting negatively affected by interest rate movement. This is called duration risk. Therefore, debt investments with longer maturity periods are more likely to get affected by the interest rate cycle.

Also, there’s an element of credit risk to be considered while investing in ultra-short-term mutual funds. If the fund manager includes low credit-rated instruments in the fund portfolio, your investment in this fund is exposed to credit risk.

Track record of the scheme

It is not wise to start investing in a mutual fund scheme based on its past performance. However, evaluating a scheme based on the track record of fund management can be a good practice. Check how the fund has performed across different economic cycles. Checking the track record of the scheme and the fund house will ensure that your investment is in a credible ultra-short-term debt fund.

Investment objective and tenure

Be it any investment, considering investment goals and the horizon is of utmost importance. If your investment horizon is less than one year, it is prudent to invest in ultra-short-term funds like Nippon India ultra-short duration fund.

Cost of fund management/ expense ratio

Each mutual fund carries a certain fund management fee, also known as the expense ratio . Although SEBI regulations have capped this fee at 1.05%, this is an important factor to be considered before investing in any ultra-short-term debt fund. The lower the expense ratio of the scheme, the slightly higher returns can be reflected in your portfolio.


How to Invest in Ultra Short-Term Mutual Funds?

You can either opt for a lump sum investment mode or the SIP Systematic Investment Plan* route to invest in ultra-short-term mutual funds. There’s no upper limit to investment in these schemes, and you can start with as low as Rs. 500 as well. To invest now, visit our Nippon India Ultra Short Duration Fund page.

You can easily start investing in the ultra-short-duration fund via any AMC’s website or through investment portals. Once your KYC verification is done, it is a simple, hassle-free process to start investing. With online platforms, it is now extremely easy to monitor and redeem your investment on the go as well.

The bottom line is that if you are looking for a low-risk investment option to park your surplus or invest in a stable and safer instrument for a short duration, ultra-short-term funds can be the right choice.


*SIP stands for Systematic Investment Plan wherein you can regularly invest a fixed amount at periodical intervals and aim for better benefits over a period of time through power of compounding.


The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.

​Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.

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