Ultra Short Term Funds: A Guide to Smart Investments

Ultra short term funds have gained popularity among investors seeking higher returns than traditional savings accounts while still maintaining a low level of risk. These funds invest in a diversified portfolio of fixed-income securities with short-term maturities, typically ranging from a few weeks to a few months. In this article, we will explore the benefits of ultra short term funds, factors to consider when selecting these funds, and the top 5 ultra short term funds that have consistently performed well.

Benefits of Ultra Short Term Funds

Ultra short term funds offer several benefits to investors. Firstly, they provide a higher yield compared to traditional savings accounts, making them an attractive option for those looking to maximize their returns. Additionally, these funds have a relatively low level of interest rate risk since they invest in securities with shorter maturities. This makes them less susceptible to fluctuations in interest rates compared to longer-term bond funds.

Another advantage of ultra short term funds is their liquidity. Investors have the flexibility to access their funds quickly and easily, allowing for better cash flow management. Furthermore, these funds can serve as a short-term parking place for excess cash, providing a safe and stable investment option during uncertain market conditions.

Why Choose Ultra Short Term Funds Over Savings Accounts?

Conventional investors tend to favor savings accounts due to their perceived stability and guaranteed returns. However, ultra short term funds can offer higher returns while still minimizing market risk. Let's compare the returns of savings accounts and ultra short term funds to understand why the latter may be a better investment option.

Illustration: A Comparison of Returns

To illustrate the potential difference in returns, let's consider an investor who invests INR 40,00,00 in both a savings account and an ultra short term fund. Assuming an interest rate of 3.5% p.a. for the savings account and 8% p.a. for the ultra short term fund, let's compare the returns:

 

 

The table clearly demonstrates the potential for higher net income from ultra short term funds compared to savings accounts. Even investors in the highest tax bracket of 30% can benefit from returns of INR 9,600, which is significantly more than the INR 12,800 offered by a savings account.

Top Ultra Short Term Funds for Investments in India FY 23-24

When choosing an ultra short term fund, it's essential to consider various factors such as the fund's net asset value (NAV), net assets, performance over different time periods, debt yield, modified duration, and effective maturity. Let's take a closer look at the top 6 ultra short term funds in India for the financial year 2023-2024:

1. Aditya Birla Sun Life Savings Fund

NAV: ₹487.303 ↑ 0.06
Net Assets (Cr): ₹13,711
3-Month Returns: 1.6%
6-Month Returns: 3.4%
1-Year Returns: 7.2%
3-Year Returns: 5.2%
2022 Returns: 4.8%
Debt Yield (YTM): 7.75%
Modified Duration: 5 Months 19 Days
Effective Maturity: 6 Months 7 Days

The primary objective of Aditya Birla Sun Life Savings Fund is to generate regular income through investments in debt and money market instruments. The fund invests its net assets in fixed income securities, money market instruments, cash, and cash equivalents. With a moderately low risk profile, it has achieved a CAGR/Annualized return of 7.4% since its launch. Aditya Birla Sun Life Savings Fund is ranked 6 in the Ultrashort Bond category.

2. SBI Magnum Ultra Short Duration Fund

NAV: ₹5,341.49 ↑ 0.56
Net Assets (Cr): ₹13,270
3-Month Returns: 1.6%
6-Month Returns: 3.3%
1-Year Returns: 4.9%
3-Year Returns: 4.5%
2022 Returns: 7.3%
Debt Yield (YTM): 7.38%
Modified Duration: 5 Months 1 Day
Effective Maturity: 5 Months 12 Days

The SBI Magnum Ultra Short Duration Fund aims to provide investors with a high level of safety, liquidity, and returns. The fund primarily invests in a diversified portfolio of debt and money market instruments. With a focus on capital preservation and income generation, it has delivered consistent performance over different time periods.

3. ICICI Prudential Ultra Short Term Fund

NAV: ₹24.7435 ↑ 0.00
Net Assets (Cr): ₹12,413
3-Month Returns: 1.6%
6-Month Returns: 3.3%
1-Year Returns: 6.9%
3-Year Returns: 5.1%
2022 Returns: 4.5%
Debt Yield (YTM): 7.69%
Modified Duration: 5 Months 16 Days
Effective Maturity: 6 Months 11 Days

The ICICI Prudential Ultra Short Term Fund aims to provide investors with regular income while maintaining a high level of liquidity. The fund invests in a diversified portfolio of debt instruments, including government securities, corporate bonds, and money market instruments. With its consistent performance and focus on capital preservation, it has garnered a reputation as a reliable investment option.

4. Kotak Savings Fund

NAV: ₹38.4283 ↑ 0.01
Net Assets (Cr): ₹13,277
3-Month Returns: 1.5%
6-Month Returns: 3.2%
1-Year Returns: 6.8%
3-Year Returns: 4.8%
2022 Returns: 4.8%
Debt Yield (YTM): 7.55%
Modified Duration: 4 Months 20 Days
Effective Maturity: 6 Months 29 Days

The Kotak Savings Fund aims to generate regular income and provide liquidity while maintaining low to moderate levels of risk. The fund invests in a mix of debt and money market instruments, focusing on high-quality securities with the potential for capital appreciation. With its consistent performance and focus on risk management, it has gained popularity among investors.

5. UTI Ultra Short Term Fund

NAV: ₹3,803.19 ↑ 0.43
Net Assets (Cr): ₹2,227
3-Month Returns: 1.6%
6-Month Returns: 3.2%
1-Year Returns: 6.7%
3-Year Returns: 5.6%
2022 Returns: 4.2%
Debt Yield (YTM): 7.7%
Modified Duration: 5 Months 20 Days
Effective Maturity: 5 Months 28 Days

The UTI Ultra Short Term Fund aims to provide investors with reasonable returns through investments in a diversified portfolio of debt and money market instruments. The fund follows an active investment strategy, focusing on credit quality and interest rate movements to optimize returns. With its disciplined approach and consistent performance, it has become a preferred choice for conservative investors.

6. DSP BlackRock Money Manager Fund

NAV: ₹3,059.96 ↑ 0.25
Net Assets (Cr): ₹2,609
3-Month Returns: 1.7%
6-Month Returns: 3.2%
1-Year Returns: 6.7%
3-Year Returns: 5.4%
2022 Returns: 4.1%
Debt Yield (YTM): 7.62%
Modified Duration: 5 Months 1 Day
Effective Maturity: 5 Months 16 Days

The DSP BlackRock Money Manager Fund aims to provide investors with a high level of liquidity and stable returns. The fund invests in a diversified portfolio of high-quality debt and money market instruments. With a focus on capital preservation and income generation, it offers a reliable investment option for conservative investors.

Conclusion

Investing in ultra short term funds can be a smart strategy for individuals seeking higher returns than traditional savings accounts. These funds provide a balance between safety and growth, offering investors the opportunity to maximize their returns with minimal market volatility.