As cautious and smart individuals, we all have a part of our income put away as savings. These savings are usually deposited with a bank for the purpose of use in times of emergencies when unexpected expenses may arise and funds are required. Also, for many people, putting away their savings in a bank is one of the safest options. Not only is their money safe but it also earns interest, though at a very nominal rate of around 4%, over a period of time. However, there are very few people who are aware of the existence of an equally profitable investment option available in the mutual fund universe. This option is known as Ultra-short term debt fund.
Ultra short term funds, also known as liquid plus funds, are the new popular investment option which investors can benefit from, due to their growing interest rates. Ultra short term funds are basically those funds which allow you to invest in fixed-income instruments which are characterized by a very short maturity period and easy liquidity. These instruments carry a far lower interest risk as compared to long term investments.
Considering that these funds are accompanied by very short durations, therefore, as compared to medium or long term funds, the impact of increase in interest rate will have a significantly lower impact on these funds. Ultra short term debt funds invest a majority of its funds in other short term instruments and call money, which lends easy liquidity to these funds.
An ultra short term debt fund portfolio primarily consists of diverse investments like government of India issued Treasury Bills, Commercial Papers which have been issued by corporate organizations, bank issued Certificates of Deposit, Securitized advances and debt in the call money market with a maturity period ranging between 90 and 365 days. In case the rate of interest rises, then the value of the fund will drop, but, if the rate of interest drops, then the value of the fund appreciates. An ultra short term debt fund is managed by a fund manager who helps bring together a varied portfolio consisting of fixed-income instruments which feature varying maturity periods.
As a mutual fund product, the primary goal of an ultra short term debt fund is to provide the investor with reasonable returns in a short duration, while also offering easy liquidity for their investment.
Ultra short term debt funds will ordinarily yield annualized returns between the rates of 4.5% to 7%. If you, as an investor, are looking to invest in ultra short term debt funds for a time frame that is below a year, then, it is advised that you opt for the dividend option. This will help ensure that you receive better post-tax returns.
Disclaimer
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.
