Mutual Fund Unlocked: Ultra short-term funds

As we know that liquid funds are very useful to create emergency funds or for the purpose of opting STP (Systematic Transfer Plan) into equity funds or to park money temporarily at any point of time, in the same way, another category of debt funds, that is, ultra short-term funds can be used for the same purpose.

These ultra short-term funds can be used for the slightly longer term than that of the liquid funds. These funds invest in fixed-income instruments which are mostly liquid and have short-term maturities. These funds have no such rules like liquid funds of investing in securities that mature 91 days. These funds can invest in both types of securities that mature before or beyond 91 days.

The key risk with the ultra-short term funds is that one fund among the basket can be quite different from another fund. With the absence of any regulatory definition, these funds could be like a liquid fund or can be closer to a short-term bond fund. Usually, the fund houses use a few strategies in these funds to safeguard the investment and returns.

First, some of these funds actively manage their portfolio’s maturity. In this strategy, the risk of maturity should be considered, because if the fund manager miscalculates the direction of the interest rate movements it may incur losses. Secondly, some of the schemes invest in low-rated scrips. So the improvement in the credit rating will aid the price and thereby the net asset value (NAV) of the fund. The third strategy used is investing in the government securities. With all these strategies, these funds reap returns of around 7-9 per cent, if all goes well.