What are ultra short-term mutual funds?

For investors who want to invest for the short term and protect their corpus from the risks of changing interest rate regimes, ultra-short-term mutual funds can be an excellent choice.

Debt funds are popular mutual funds for investors who want to invest safely and protect their funds from the equity market’s volatility. The debt funds invest primarily in the money market instruments like bonds, treasury bills, and certificates of deposits. The Securities and Exchange Board of India (SEBI) has divided debt funds into sixteen categories. 

Ultra short-term funds are placed midway from the overnight or liquid funds and other debt funds. We will explore everything about ultra short-term debt funds, the advantages of investing, and investing profile.

What are ultra short-term funds?

As the name suggests, these schemes have a short investment duration of three to six months. These funds invest in debt instruments of shorter tenure, so the Macaulay duration of the funds is at most six months. Although these are low-risk funds, ultra-short-term mutual funds are slightly above the liquid funds in the risk spectrum. These funds are best suited for conservative investors and investors wanting to invest for a specific financial goal. 

These funds generate an average return of 7-9 percent.

How Ultra Short-Term Fund Works?

Ultra Short Term Funds (USTFs) operate by investing in a diversified portfolio of short-term fixed-income securities such as Treasury bills, commercial paper, and short-term bonds. These funds aim to provide investors with slightly higher returns than traditional savings accounts or money market funds while maintaining relatively low levels of risk. 

By focusing on securities with short maturities, USTFs mitigate interest rate risk compared to longer-term bond funds. They offer high liquidity, allowing investors to access their funds easily, and typically have relatively low expense ratios. 

However, investors should be aware of credit risk and liquidity risk associated with USTFs, as well as the potential tax implications of investing in these funds. Overall, USTFs can be an attractive option for investors seeking a balance between low risk, moderate returns, and liquidity in their investment portfolios.

Advantages of ultra short-term funds

Investing in ultra-short-term debt funds offers several benefits.

  • These are ideal for investors wanting to park their capital for a short period – a couple of weeks or a few months.
  • A loss arising from changing interest rates is nearly zero if someone invests for less than three months.
  • The returns from these funds are comparable to the bank’s fixed deposit of similar investment tenure.  

Who should invest in ultra short-term funds?

These funds are designed to offer high liquidity within a short period. Since the Macaulay duration of these funds is between three to six months, these are best suited for short-term investment. Investors can park their money in an ultra-short-term fund that offers a higher return than a bank’s savings account.  

However, you must find a fund that fits your overall financial and investment plan. Individuals may research the market for the best ultra short-term fund before investing. 

Factors to consider before investing 

Here are some factors investors should consider while investing in ultra-short debt funds.

Risk and return:

Ultra-short funds carry three common risks to all debt funds.

  • Credit risk:

    It refers to the risk of default by the issuer of the underlying debt. 

  • Interest rate risk:

    It is a risk that is associated with a change in interest rate. 

  • Liquidity risk:

    The fund house does not have sufficient funds to meet redemption requests from investors.

Expense ratio

Since the return from these funds is less than equity funds, investors must try to reduce as many costs as possible to maximise their gains. The expense ratio is a fee levied by the fund management company for offering fund management services.

Investment plan

Before investing in a scheme, you must clearly define your investment objectives, financial goal, and risk appetite. These funds are crafted to suit the needs of conservative investors to generate low-risk returns and offer quick liquidity.   

Investors must find the best ultra-short debt funds to minimise credit risks. So, they must choose funds with high-rated securities to minimise credit risks. Consistency of the fund through different interest rate cycles is another critical component. An experienced fund manager will ensure the fund performs optimally in a changing interest rate regime. 

Financial goal 

Investors with short-term financial goals or who need a systematic transfer plan (STP) can invest. These funds have a duration longer than liquid funds. Hence, they allow investors to plan for their short-term financial goals. Also, you can set up a systematic transfer plan with an ultra-short-term fund before moving your fund to riskier options like equity funds.  

Individuals seeking regular monthly income can park a portion of their retirement fund to generate stable returns.

How To Invest in Ultra Short-Term Funds?

Investing in the ultra short-term funds is hassle-free when done through your Angel One account. You just have to follow these simple steps:

Step 1: Log in to your Angel One account. 

Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.

Step 2: Determine an ultra-short-term fund that suits your needs and risk profile. You can learn more about each ultra-short-term fund on the Angel One app. Things to consider at this stage are:

  1. Search for the fund you want to invest in.
  2. Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
  3. Evaluate the fund’s level of risk, its ratings and expense ratio.

Step 3: Once you finalise the high-risk fund you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it. 

  1. Decide whether you want to invest via SIP or make a one-time investment
  2. Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
  3. After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.

Taxation on ultra-short-term bonds 

It is worth noting that when you invest in mutual funds, the capital gain from your investment will attract capital gain tax. The tax rate depends on the duration of your investment. Based on the tenure of your investment – short-term or long-term capital gain tax will apply. 

Short-term capital gain from these funds is added to the investor’s total income and taxed as per the income tax slab. The long-term capital gain tax rate is 20% with indexation and 10% without indexation. 


After learning about ultra short-term funds, it’s time to explore the best ultra short-term funds. If it is difficult for you to make financial decisions alone, you can always go to financial advisors, who will help you select the best investments depending on your short and long-term financial goals.


How do ultra-short-term funds work?

Ultra-short-term funds work by investing in a diversified portfolio of short-term fixed-income securities such as Treasury bills, commercial paper, and short-term bonds.

How long should I stay invested in Ultra Short Duration Mutual Funds?

The ideal investment duration in Ultra Short Duration Mutual Funds depends on your financial goals, risk tolerance, and liquidity needs. These funds are suitable for investors looking for a short-to-medium-term investment horizon, typically ranging from a few months to a couple of years.

Are Ultra Short Duration Mutual Funds high risk?

Ultra Short Duration Mutual Funds are generally considered to be lower risk compared to other mutual funds, such as equity funds or longer-term bond funds. However, they are not entirely risk-free.

Where do Ultra Short Duration Mutual Funds invest?

Ultra Short Duration Mutual Funds typically invest in a diversified portfolio of short-term fixed-income securities, including Treasury bills, commercial paper, certificates of deposit (CDs), and short-term bonds.