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What are ultra short term funds and how they differ from short term funds

Ultra short term funds are the open ended funds which gives investors security and liquidity. The corpus is invested in fixed income instruments like money market and debt securities instruments. These are mostly liquid and have short term maturities

When considering investing in funds that are liquid and also fetch you marginally higher returns than short-term funds, you must try ultra-short term funds. Earlier referred to as liquid plus funds, ultra short term funds invest in very short term debt securities. So basically, smaller portions of the funds are invested in longer term debt securities. Here the investor’s risk goes up by a notch, so as to earn corresponding degree of returns. Ultra short term funds are favorable to investors who have some surplus funds to park for nearly nine months.

Having defined what are ultra-short-term funds (also referred to as ultra ST funds) below are a few points that clearly differentiate short term funds and ultra ST funds. Also these can help the investor’s to look at both the funds very objectively and choose what best suits them between the both.

Maturity

While short term funds/ liquid funds offer a maturity up to ninety days, the average being 45-60 days. Ultra short-term funds generally lay emphasis on securities with maturity over 90 days, average being 150 days or less. How liquid you wish your fund to be and for what duration can you park your money will help you decide which fund fits the maturity criterion.

Market Volatility

Largely there is no mark-to-market requirement in case of liquid funds, so the NAV valuation happens on accrual basis. Whereas in case of ultra ST funds the securities with maturity over 90 days require a change in yield to be recorded on daily basis based on the change in the market price. This makes the NAV more volatile. However, the impact is not high and only minimalizes the impact of price change.

Risk

Due to low maturity period short term funds/liquid funds are less risky than ultra-short term funds. The high risk factor of ultra ST funds protects against interest rate risk, but is not immune to market fluctuations.

NAV on Redemption

Transfer of funds beyond a time span gets your NAV of previous day in case of liquid funds, whereas in case of ultra ST funds there’s no such provision.

Tax Implications

Short term funds are subject to a dividend distribution tax of 25% and for ultra short term funds, tax is 12.5 %.

Exit Load

There’s no exit load attached to liquid funds, but ultra ST funds charge an exit load ranging between 0.1-1%, if redeemed before the said time that generally ranges from between one week to six months. The exit load attached ensures stability to manage the fund outflow and is advantageous for investors as it reduces the NAV volatility.

Consider the border line differences between both the funds when choosing between the two. While one gives better liquidity, there are better returns attached with ultra ST funds. Though both the funds give around 8.5-9.5% and are considered relatively less risky because of short maturity, they make good instruments to park funds. Check and ensure what works best for your investment criterion and if unable to choose what’s best, seek advice of a fund manager, a money market expert or an asset management company that is dependable like Reliance Mutual Funds.

 

Source: Free Articles from ArticlesFactory.com

ABOUT THE AUTHOR


Having varied interests and diverse knowledge, Himani Arora writes articles for several sectors and categories in personal finance, mutual funds and investments.



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