If you have money sitting idle for a few months and want it to earn a bit more than a savings account, ultra short duration funds are worth a look. These debt mutual funds invest in fixed-income securities with maturities of three to six months, which keeps things fairly stable while still offering slightly better returns. They sit between liquid funds and longer-duration debt funds on the risk scale — a bit more risk than a liquid fund, but a lot less than what you would take on with longer-term debt. Redemptions are usually quick, and most of these funds skip the exit load altogether, which makes them a practical option for short-term goals without locking your money away for years.
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Name
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AUM
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3Y Returns
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|---|---|---|---|
| ₹11,613.32 cr | 6.99 % | ||
| ₹11,613.32 cr | 0.28 % | ||
| ₹18,857.07 cr | 7.22 % | ||
| ₹10,697.95 cr | 6.84 % | ||
| ₹10,697.95 cr | 6.63 % | ||
| ₹18,857.07 cr | 7.31 % | ||
| ₹3,576.38 cr | 6.73 % | ||
| ₹3,576.38 cr | 6.31 % | ||
| ₹10,697.95 cr | 6.96 % | ||
| ₹14,994.34 cr | 6.80 % |
An ultra short duration fund is a debt mutual fund that sticks to fixed-income securities with a Macaulay duration of three to six months. That duration band is exactly how SEBI defines this category, and it is what keeps these funds less sensitive to interest rate swings than longer-term debt funds, while still earning a bit more than liquid funds.
The portfolio usually holds a mix of treasury bills, certificates of deposit, commercial papers, and short-term corporate bonds. Since everything inside matures fairly quickly, the fund’s Net Asset Value (NAV) does not move around as much as it would in a longer-duration debt fund when interest rates shift. Getting your money out is generally hassle-free too — most ultra short duration funds do not charge an exit load, which makes them a sensible choice for anyone who wants short-term stability with a small edge over what a liquid fund typically delivers.
Ultra short duration funds invest in a diversified portfolio of fixed-income instruments with short maturities to balance liquidity and return. These funds operate with a focus on reducing interest rate risk while offering slightly higher yields than liquid funds.
Ultra short duration funds are an ideal choice for investors seeking short-term capital appreciation with low-to-moderate risk. They also work well as an investment vehicle for systematic transfer plans (STP), allowing investors to transition funds into equity funds over time.
Ultra short-term mutual funds come with distinct characteristics that make them suitable for short-term investments. Below are some of the key features:
These funds invest in short-term fixed-income securities such as treasury bills, commercial papers, and money market instruments.
The fund’s portfolio consists of securities with maturities ranging from three to six months, making them slightly riskier than liquid funds but safer than long-term debt funds.
Due to the short tenure of the underlying securities, these funds are less sensitive to interest rate fluctuations than longer-duration bond funds.
Investors can redeem their investments with ease, and many funds do not charge an exit load, offering high liquidity.
These funds typically generate returns in the range of 7–9%, which can be competitive with fixed deposits of similar tenure.
Fund houses charge a management fee (expense ratio) for overseeing the investments. As per SEBI, the maximum limit is 1.05%.
Returns from these funds are subject to short-term or long-term capital gains tax, depending on the holding period.
Ultra short-term funds can be categorised based on the type of underlying securities and risk profile. Below are the common types:
These funds primarily invest in government-backed securities like treasury bills, ensuring high credit quality with minimal default risk.
These funds invest in corporate debt instruments, which may offer slightly higher returns but come with credit risk.
Comprising treasury bills, commercial papers, and certificates of deposit, these funds focus on short-term money market instruments for stability and liquidity.
These funds invest primarily in debt instruments issued by banks, public sector undertakings (PSUs), and public financial institutions, offering relatively secure returns.
Designed for investors willing to take on more risk, these funds invest in lower-rated debt securities for the potential of higher returns.
These funds actively manage their portfolio based on market conditions, shifting between different short-duration debt instruments to optimise returns.
Ultra Short Duration Funds are designed for investors who seek short-term investment options with relatively low risk and quick liquidity. These funds are ideal for:
If you want to park surplus funds while earning slightly higher returns than a savings account, ultra-short duration funds can be a good choice.
These funds suit investors who need liquidity within three to six months, such as those planning a large purchase or an emergency fund.
Conservative investors who want stable returns with minimal risk can consider these funds. They carry lower risk than equity funds while providing higher returns than fixed deposits.
If you plan to invest in equity mutual funds but want to stagger your investments, you can use ultra-short-term funds as a parking option and set up an STP.
Individuals looking for a low-risk investment option to generate stable monthly income can allocate a portion of their retirement corpus to these funds.
Investing in Ultra Short Duration Funds is a straightforward process. If you are using Bajaj Broking, you can follow these steps:
If you do not already have an account, you need to open one. This requires submitting necessary documents such as identity proof, address proof, and PAN details.
Before investing, evaluate different ultra-short duration funds based on:
Past performance – Check historical returns, though past performance does not guarantee future results.
Risk profile – Assess the credit quality of underlying securities and the fund’s exposure to interest rate risk.
Expense ratio – Lower expense ratios can help maximise your net returns.
Tax implications – Consider short-term and long-term capital gains tax based on your investment horizon.
Systematic Investment Plan (SIP) – Invest a fixed amount regularly for disciplined investing.
Lump sum investment – Make a one-time investment based on your financial goals.
Log in to your Bajaj Broking account.
Navigate to the Mutual Funds section and select the chosen ultra-short duration fund.
Enter the investment amount and payment method.
If opting for an SIP, set up an AutoPay feature for seamless future instalments.
By following these steps, you can efficiently invest in ultra-short duration funds and optimise your short-term financial planning.
Ultra-short-term funds offer a range of benefits, making them an attractive investment option for those looking for short-term parking of surplus funds. These funds provide a balance of liquidity, stability, and returns. Below are some key advantages:
Ultra-short-term funds allow investors to withdraw funds at any time without restrictions, unlike fixed deposits or other bank deposits that may have lock-in periods or penalties for early withdrawal.
Typically, ultra-short-term funds do not charge an exit load, meaning investors can redeem their units without incurring extra costs. This makes them a flexible investment option for short-term needs.
If investors hold their investment for less than three months, the impact of interest rate fluctuations on returns is nearly zero, offering a stable investment option in volatile interest rate environments.
In a low-interest-rate regime, ultra-short-term funds can offer better returns than bank deposits, making them a viable alternative for short-term investments. These funds typically generate returns in the range of 7–9%.
Some fund houses allow investors to systematically transfer a fixed amount from their ultra-short-term fund to equity mutual funds. This strategy enables investors to benefit from market fluctuations by averaging out the cost of investing in equity over time.
Despite their advantages, ultra-short-term funds come with certain risks. Investors should be aware of the following before making an investment decision:
This refers to the risk of default by the issuer of the underlying debt securities.
If the fund holds lower-rated securities, the chances of default increase, affecting investor returns.
To minimise this risk, investors should opt for funds that invest in high-rated securities.
The value of ultra-short-term funds fluctuates with changes in interest rates.
When interest rates rise, the Net Asset Value (NAV) of the fund may fall, reducing returns.
However, since these funds invest in short-duration instruments, they are less affected by interest rate changes compared to long-term debt funds.
If many investors redeem their units simultaneously, the fund house may struggle to meet these redemptions, leading to liquidity issues.
This could impact the ease with which investors can access their funds.
Investors should carefully analyse these risks and choose funds with high-quality debt instruments to ensure stability in their short-term investments.
Before investing in ultra-short-duration funds, it is essential to evaluate key factors that can impact returns and overall investment suitability. Here are some important aspects to consider:
Ultra short duration funds are debt mutual funds, and how they are taxed changed quite a bit from April 1, 2023, under the Finance Act 2023. The old system, which treated gains differently based on how long you held the investment, no longer applies.
For units bought on or after April 1, 2023, every gain from an ultra short duration fund is taxed at your income tax slab rate, no matter how long you stayed invested. There is no separate long-term rate anymore, and indexation is off the table too.
If you go with the dividend option, those payouts get added to your taxable income and taxed at your slab rate as well. Cross ₹5,000 in dividends within a financial year, and the fund house will deduct 10% as Tax Deducted at Source (TDS) before paying you.
Ultra Short Duration Funds are generally suitable for conservative investors seeking slightly higher returns than traditional savings accounts, with a short investment horizon of 3 to 12 months.
However, they do carry marginally higher risks compared to money market funds. Investors with a low-risk appetite should consider these factors before investing.
Ultra Short Duration Funds are considered to have low risk, but they are not risk-free. They may experience fluctuations in net asset value (NAV) due to interest rate changes and credit risks associated with their holdings.
Investors should be aware of these potential risks.
These funds are most suitable for conservative investors with an investment horizon of at least 3 months up to 1 year, seeking higher returns compared to traditional savings accounts, while accepting marginally higher risks.
An example of an Ultra Short Duration Fund is the Navigator® Ultra Short Bond Fund, which invests in high-quality, short-term debt securities aiming to provide current income with low volatility.
Investing in Ultra Short Duration Funds can be beneficial for investors seeking higher returns than traditional savings accounts over short periods. However, they carry slightly higher risks, and their suitability depends on individual financial goals and risk tolerance.
Ultra Short Duration Funds typically offer returns higher than traditional savings accounts, averaging between 7-9% per annum. These funds invest in debt securities with short maturities, aiming to provide stable returns over brief periods.
While considered low-risk, Ultra Short Duration Funds are not entirely risk-free. They may face interest rate risks, where rising rates can decrease bond values, and credit risks, involving potential defaults by issuers. Investors should be aware of these factors when considering such funds.
Yes, gains from Ultra Short Duration Funds are taxable. Short-term capital gains (investments held for three years or less) are taxed as per the investor's income tax slab. For investments made on or after April 1, 2023, long-term capital gains (held for over three years) are also taxed according to the investor's income tax slab, without indexation benefits.
The investment amount in Ultra Short Duration Funds should align with your financial goals, risk tolerance, and investment horizon. These funds are suitable for parking surplus funds for short durations, typically between three months to a year. Consulting with financial advisors, such as those at Bajaj Broking, can help determine an appropriate investment amount based on your individual circumstances.
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