Invest in Ultra Short Term Fund:
Ultra short-term funds are fixed income mutual fund schemes that invest in debt and money market securities. The duration of these securities is 3 months to 6 months. These funds are a better option for short-term investors. Because of their short term maturity, they are less volatile and aim for more stable income than funds with a long-term profile. Many investors get confused between liquid funds and ultra-short-term funds.
How are they different from liquid funds?
The main difference between liquid funds and ultra-short-term funds is the maturity or duration profile of these two schemes. Liquid funds invest in debt or money market instruments, which mature in 91 days. While ultra-short-term funds have a duration of 3 to 6 months. The yield curve is usually tilted upward.
For example, as of 15 September 2020, the 3-month (maturity) government securities (G-Sec) yield is 3.31 per cent, while the 6-month G-Sec yield is 3.53 per cent and the 1-year G-Sec yield is 3.72 per cent. is. (source: worldgovernmentbonds.com)
Therefore, ultra-short-term funds generally give higher returns than liquid funds. However, these funds have a longer duration than liquid funds, so they may be slightly more volatile than liquid funds on a daily or weekly basis. Therefore, you need to invest for a long time for ultra-short-term funds.
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Ultra-short-term funds: who should invest
These funds are suitable for conservative investors, whose investment target is between 3 months to 1 year. Note that in ultra-short-term funds, there is no guarantee of security, but the risk is less. Because they invest in fixed income instruments. If your investment target is more than 3 months, then there is less chance of loss. Apart from this, it should also be noted that if your investment target is 1 year or more, then apart from this you may have more suitable investment options.
Why invest in ultra-short?
Many investors, who have surplus funds, which they do not need in the next 3-12 months, can invest in these funds. You can get more benefits on this money than in a savings account. Savings bank interest rates of major PSUs and private sector banks are currently between 2.75-3.5 per cent. Ultra-short-term funds pay higher interest than your savings account. Currently, the returns of these funds are 90 to 150 bps more than the FD rates of major banks for 6 to 9 months.
Read: Invest in Debt Mutual Fund: A few days, some months to several years; Invest money as needed
How do you think tax
If your investment holding period is less than 36 months, then capital gains from the sale of units of ultra-short-term funds will be added to your income and taxed as per your income tax slab rate.
Keep these things in mind before investing
If the investment period is 3 months to 12 months then this is a better option.
Short term returns may be affected due to the expense ratio.
Put money in high credit quality paper only.
Do not select the scheme on the basis of short term performance, please check its quality.
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(Author: Vaibhav B Shah, Head-Products, Mirae Asset Investment Managers India Private Limited)
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