Ultra Short-Term Funds: Meaning, Advantages & Risks

Debt mutual funds have various categories. Each of these categories serves specific purposes. An Ultra Short-Term Fund is tailored for risk-averse investors who have a very short-term investment horizon.

In this article, we will enquire about what are ultra short-term funds, their advantages, risks, returns & common doubts.

What Are Ultra Short-Term Funds?

A mutual fund that invests in debt securities and money market instruments so that the Macaulay duration of the fund is 3 to 6 months, is called an ultra short-term fund.

The fund manager designs a diversified portfolio of money market instruments and debt securities that will mature within the 3 to 6-month timeframe.

Once the existing securities reach maturity, the fund manager reinvests the redeemed capital into fresh securities.

As these funds invest in short-term fixed-income securities, they attain a good level of liquidity enabling investors to buy or sell these funds easily.

[ Related Overnight Funds | Liquid Funds ]

Best Performing Ultra Short-Term funds

Based on past performance, here is a short list of Ultra short-term funds. This list does not contain any recommendations or investment advice.

Fund Name1-Year CAGR3-Year CAGR
HDFC Ultra Short-Term Fund6.93%5.04%
SBI Magnum Ultra Short Duration Fund6.79%4.77%
Bandhan Ultra Short-Term Fund6.79%4.68%
DSP Ultra Short Fund6.88%4.84%
HSBC Ultra Short Duration Fund6.91%4.89%
Last Updated: August 2023

Advantages Of Ultra Short Duration Funds

Let’s explore what advantages ultra-short-term funds offer to their investors.

1. Low Risk

As these funds invest in short-term fixed-income securities, the risk factor is considerably low compared to some other debt mutual funds. Investors must ensure that the selected fund is investing in high-rated securities to mitigate risks.

2. Better Returns Than Savings Accounts

With ultra-short-term funds, you take a bit of risk and make your money earn better returns than that of a savings account. Generally, savings accounts offer 2-3.5% returns while these funds offer 4-8% annual returns.

3. Good For Short-Term Goals

These funds are excellent options for temporarily holding your money to achieve short-term goals. For instance, if you’ve saved money for an upcoming trip that is still months away, you can invest your funds in an ultra-short-term fund to generate some additional income from your savings.

Risks And Considerations

Ultra short-term funds come with their own set of risks. Let’s have a look at these!

a. Interest Rate Risk

These funds are sensitive to fluctuations in interest rates. A tiny increase or decrease in the interest rates can significantly impact the value of the fund.

B. Credit Risk

Even though these funds invest in relatively safer short-term securities, there is still a risk that some issuers may default on their payments.

C. Liquidity Risk

While ultra-short-term funds offer better liquidity than some other funds, they may lack liquidity in certain conditions such as during times of market stress.

D. Expense Ratio & Charges

Given that ultra-short funds typically yield lower returns than equity funds, it’s essential to take into account the expense ratio and other associated charges. These factors can potentially diminish the net returns of these funds.

How To Invest In Ultra Short-Term Funds

Investing in these funds is easy. You are only a few steps away from investing in ultra-short-term funds. Here are the steps:

  1. Choose a mutual fund company
  2. Select a suitable ultra-short fund
  3. Set up an investment account with the company or any online platform that offers the funds you choose.
  4. Complete KYC and necessary documentation
  5. Decide the amount and mode of investment
  6. Make the payment & start investing!


  1. How are Ultra Short-Term funds taxed?

    Ultra Short-Term Funds are a type of debt mutual fund. As per recent changes in taxation rules for debt mutual funds, these funds are now subject to taxation according to the applicable Income Tax slab rate.

  2. Can I Withdraw Money From ultra-short Funds Anytime?

    Yes, these funds offer a good level of liquidity to investors. Hence, you can withdraw money from ultra short-term funds anytime without any exit load.

  3. Do Ultra Short Funds have lock-in periods?

    Most ultra short-term funds do not have a lock-in period as they are designed to provide liquidity.

  4. Are ultra Short Term Funds and debt Funds the same?

    Ultra short-term funds are a sub-category of debt mutual funds.

  5. Can I Do SIP in an ultra short-term fund?

    Yes, investors can choose to systematically invest in these funds using the SIP mode of investment.

A commerce graduate turned a digital creator to follow his passion for writing and sharing useful & well-researched information that adds some value to people's lives.

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