Why Ultra Short Term fund?Ultra short-term funds invest only in fixed-income instruments with very short-term maturities. It helps investors avoid interest rate risks, yet they are riskier but also offer better returns than most money market instruments. This investing strategy tends to offer higher yields than money market instruments, with less
price fluctuations than a typical short-term fund. If investment made in lump sum amount in an equity fund, it is better instead of putting everything in the equity fund at one time, money can be invested in an ultra short-term fund (of the same fund house or other fund house through SWP) and then give instructions to switch a regular sum every month to your equity fund also for systematic transfer plans (STPs).
This way, while money lies in an ultra short-term fund, it also earns a bit more than what your liquid fund could give you.
- Moderately low risk
- Investment in debt and money- market securities
- Wide range of instruments - Predominantly AAA /AA+, while taking selective exposure to non AAA bonds with a rating floor of AA-.
- Portfolio contains Certificates of deposits, treasury bills, commercial papers, and corporate bonds etc.
- Average maturity from 91 days to less than 1.5 years.
- Variance in bond prices may leads to negative returns.
Ways to use UST funds
- Park money that you need in the next 3 months to a year
- Use it along with liquid funds to build an emergency fund
- Park a part of your retirement portfolio in UST funds (along with other categories of debt funds such as short- term and income funds) and dilute it into equity and use it to generate monthly income by way of systematic withdrawal plan.
- Use it to park money that you will need for paying your insurance premium, school fees etc.
- To offset the typically greater volatility of bond and equity investments.
Investors looking to invest in fixed income can go for short term debt funds as they will have low volatility. For investors to start with, ultra-short term funds are the good option because these funds offer a good experience in terms of returns, risk and
liquidity. These debt funds are the best ‘first-step’ towards equity investments or any other type of mutual fund investment in the future.
Vatsal Shah | Head - Wealth ManagementHe has been in the field of financial advisory for more than 8 years. His strength is building relationships and providing innovative solutions to investments. His work involves managing the wealth management department for Mutual Funds, IPOs, Bonds and Insurance.