Considering investments in ultra short term funds in India? You should know that these ultra short funds in India are mostly short-term mutual funds investing in a diverse combination of debt-based instruments inclusive of certificates of deposits, treasury bills, corporate bonds and commercial papers alike. These funds usually have residual maturity varying between 6 months and a year. These funds mostly offer attractive returns with lower volatility in the market as well. They are ideal for those investors requiring to deploy capital for shorter time-frames like one month or even two months. Those looking for better returns as compared to liquid funds may also consider deploying their investments in ultra short term funds in India.
Traditional investors often prefer savings accounts for keeping their money, fearing volatility and fluctuations in the market once they invest in mutual funds. However, ultra short funds in India may be superior alternatives in these cases as per market experts. These funds are open-ended in terms of their category while being majorly debt funds and investors may start with minimum amounts ranging between Rs. 5-10,000 on an average. Redemption is usually a low-risk affair and if you register the redemption request prior to 3 PM on a particular day, you will receive the amount redeemed after a day or so. Yet, if the redemption request is dispatched post 3 PM, then the redemption based request will be processed on the day after.
Some things that investors should consider include the risk aspect, i.e. these funds have greater immunity towards risks arising from interest rate related factors owing to the shorter maturity of the underlying assets. Yet, in comparison to liquid funds, these funds have comparatively higher levels of risks. The investment blueprint of fund managers may come up with credit risks whenever there is incorporation of low-rated securities with expectations of future upgrades. Also, introducing government securities may lead to an increase in volatility of funds which is more than overall expectations. Investors may anticipate approximate returns hovering between 7-9% on an average from these funds in an environment where rates of interest remain stable.
The returns are moderately more than what liquid funds mostly offer. Although the funds are ideal for generating fixed income, they may not always come with returns that are guaranteed. You should consider the YTM or yield to maturity factor for understanding more of what you should expect with your investments. The funds also charge a nominal fee for money management which is known as the expense ratio. Until now, the SEBI (Securities and Exchange Board of India) had fixed the upper limit of this expense ratio as 2.25% and this is subject to change periodically as well. Taking into account overall returns generated by these funds in comparison to liquid funds, long-term holding periods and lower expense ratios, it will be easier to recover money that has flowed out due to fluctuations in rates of interest.