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Factors to consider before investing in ultra-short-term funds

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Now that debt funds are divided into 16 categories by the Securities and Exchange Board of India (SEBI), investors can select the fund that is most compatible with their investing strategy. Ultra Short Mutual Funds are a suitable choice for cautious investors with a maximum six-month investment horizon. These funds have a shorter duration than the other debt funds but a longer length than overnight and liquid funds. In this article, we'll examine ultra-short-term mutual funds and go over everything you should know before investing.


What are Ultra Short-Term Mutual Funds?

Investments in debt securities and money market instruments are made by ultra-short-term mutual funds to enable the Macaulay. The portfolio of the fund has a three to six-month duration. Therefore, these products are best for conservative investors with a three to the six-month investment horizon. However, investors who desire to reach certain financial goals in 6 months should use these ETFs. These ETFs' typical returns range from 7 to 9%.


Factors to consider while investing in ultra-short-term funds:

Risk and Returns

As a debt fund, an ultra-short-term fund is subject to the same three risks as all debt funds:


The risk of the issuer of the underlying securities defaulting is referred to as credit risk.

Interest rate risk is the impact of rising or falling interest rates on a fund's value.

Liquidity risk stands for the possibility that the fund house won't have enough cash on hand to fulfil redemption requests.

Therefore, it is crucial to examine the fund's portfolio to verify that it makes investments in highly rated assets that substantially reduce credit risk. Additionally, you should do some research on the fund manager to determine how he has performed in the past during rising and decreasing interest rate cycles.


Keep in mind that the best performance of the fund can be guaranteed by a fund manager with relevant experience managing investments through shifting interest rate regimes. Returns on an optimally managed Ultra Short Fund portfolio should range between 7-9%.


Expense Ratio

An Ultra Short Term Debt Fund often offers lesser returns than an equity fund. This is because, in order to increase their profits, investors aim to cut as many costs as they can. The expenditure ratio, which is a fee charged by the fund house for fund management services, is one such expense. Therefore, you ought to seek out programmes with reduced expenditure ratios.


Investment Plan

A successful investor's basis is a sound investment strategy. Your investment horizon, risk tolerance, and goals must all be clearly stated. It's critical to realise that Ultra Short Funds are intended for cautious investors with a maximum investment horizon of six months. You must hunt for suitable plans if you have longer or shorter financial goals.


Are Ultra Short Funds a Good Investment?

Since an Ultra Short Fund's portfolio has a Macaulay duration of between three and six months, it is most suitable for investors with a six-month or longer investment horizon and a lower risk tolerance. Additionally, investing in these funds typically yields higher returns than saving money in a savings account for the same period of time. Additionally, it's critical to make sure your investments are in line with your financial strategy and investing goals.



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