Things to look for before investing in Ultra-Short Duration Fund

Generally, ultra-short-bond funds give better returns than bank fixed deposits (FDs). Unlike bank FDs, they are higher on the liquidity front. These funds stay away from the equity market and only invest in bonds that have a maturity period of 3 months to 6 months, which is why their returns are rather predictable. Although not the guaranteed one. There are two things you need to look at while investing, which are given below:

Returns
Many people choose funds, which have provided better returns. however, while investing in an ultra-short duration fund, you need to do exactly the opposite. This means that you need to avoid investing in the funds with the highest returns because if the fund is giving the highest returns then there are high chances that it might be taking a risk, which is not visible for the investment horizon of 3 to 6 months. So, there might be chances of loss there. If you are investing in a fixed income for a short period, you should avoid unnecessary risks. You should also check the Yield to Maturity (YTM) of the fund as higher the YTM, the higher the risk that fund is carrying.

Expense ratio
Another thing to look at is the expense ratio of the fund. A higher expense ratio eats up the returns. This is why it is better to choose a fund with the lowest possible expense ratio. On the contrary, you might also consider investing in the direct plan via the website of a fund house. The expense ratio usually for the direct plans are less than the regular plan of the same fund in the range of 0.50 per cent to 0.75 per cent. Thus, investing in a direct plan would necessarily reduce the overall cost.