- Which are the top-performing ultra short term funds in the present situation?
- Read this post that shows the top performers of this fund category
Ultra short term funds are a type of debt funds that invest in debt securities (corporate bonds, government securities and money market instruments) with an average maturity of 3-6 months. They are like liquid funds with the exception that liquid funds cannot invest in securities with maturities beyond 91 days. Since these funds invest in securities with higher maturities, the risk and return are relatively higher than liquid funds. To understand simply, this is because interest rates do not fluctuate a lot in the short term, thereby having a lesser impact on the risk & returns of various debt funds. As the average maturity of debt funds increases or is higher, interest rates have a bearing on the risk and return from that fund.
Table of Contents
Should You Invest in Ultra Short Term Funds?
If you are looking to invest for a period of 6-18 months with minimal risk, ultra short term funds are the best option. You can also use ultra short term funds to start an STP (systematic transfer plan) into an equity fund. Let us look at various parameters when investing in ultra short term funds.
Returns – The returns from an ultra short term fund are a function of the coupon or interest payment from the debt securities in the portfolio and interest rates in the economy. If the interest rates are downward sloping, the returns are in line and vice versa. In the current environment, interest rates have been decreasing which is evident from falling deposit rates on savings a/c and fixed deposits. One can expect 6-7% returns from ultra short term funds going forward which is higher than what you earn from keeping money in a savings bank a/c or a liquid fund. In a high interest rate environment, these funds can give as high as 7.5-9% returns.
Risk – The risk in ultra short term funds is low but higher than that in liquid funds. The safest debt funds are liquid funds and ultra short term funds are the next safer option. One risk which could arise in an ultra short term fund could be credit risk if the fund manager buys bonds/securities of companies with lower credit profiles. You need to be wary of this and check the portfolio before investing.
Cost – The expense ratio of ultra short term funds ranges between 0.25%-1.00% depending on the fund and direct or regular plans. This is higher than the expense ratio in liquid funds but lesser than most of the other debt funds.
Time Horizon – If you have spare funds, which are lying idle in a savings bank a/c, that you don’t need for the next 6-18 months and you do not want to take risk of investing in equity or hybrid then ultra short term funds are the best option. You can expect a 6-7% return from these funds.
Five Best Ultra Short Term Funds
Aditya Birla Sun Life Savings Fund
This fund is offered by Aditya Birla Sun Life Mutual Fund and was launched on 27th Nov 2001. This fund is benchmarked against Crisil Ultra short term debt and has returned 7.80% annualized since launch. This has been a consistent performer over the years and is rated five stars by Value Research.
ICICI Prudential Ultra Short Term Fund
This fund is offered by ICICI Prudential AMC which is one of the biggest mutual funds in the country. This fund was launched on 3rd May 2011 and manages assets worth INR 5,239 crores. It has been a good performing fund since inception and has returned 8.25% since launch. The benchmark is Nifty Ultra Short duration fund and this fund is rated four stars by Value Research.
IDFC Ultra Short Term Fund
This fund is offered by IDFC Mutual Fund which is one of the best fund houses when it comes to managing debt schemes. It is a relatively newer fund, which was launched on 18th July 2018 but has returned an impressive 7.96% since launch. The fund manages an AUM of INR 5,416 crores and is benchmarked against the Nifty Ultra Short Duration fund. This is rated four stars by Value Research.
Kotak Savings Fund
This fund is offered by Kotak Mutual Fund and was launched on 13th August 2004. This is one of the larger ultra short term funds with an AUM of INR 9,128 crores and is benchmarked against the Nifty Ultra Short Duration Fund. It has delivered a return of 7.75% annualized and is rated four stars by Value Research.
SBI Magnum Ultra Short Duration Fund
This fund is offered by SBI mutual fund which is the largest mutual fund house in the country. It is also one of the oldest ultra short term funds and was launched on 21st May 1999. This fund manages an AUM of INR 9,848 crores and is benchmarked against the Nifty Ultra Short Duration fund. It has delivered a return of 7.42% since launch and is rated four stars by Value Research.
Lets us look at the returns these funds have delivered (in % terms)
|Fund Name||Last 6 months||Last 1 year||Last 3 years|
|Aditya Birla Savings||3.69||7.85||7.67|
|ICICI Ultra Short||3.19||7.44||7.37|
|IDFC Ultra Short||3.62||7.52||N.A.*|
|SBI Ultra Short||3.52||7.48||7.58|
*IDFC Ultra Short Term Fund is yet to complete three years.
As we can see from the returns table, all these funds have delivered more than 7% consistently over the last three years. In comparison to a liquid fund and savings a/c, these funds are a better option and we would recommend you to invest with a 6-18 months’ time horizon. You can split your investment among these five funds or pick any two or three in case you want to invest in a lesser number of funds. One can also invest in any of these funds to start an STP in any equity fund.