Here is a list of factors to be considered before investing in Ultra Short Term funds: View More
Risk
Due to the short maturity of their underlying assets, ultra short-term debt funds, unlike other debt funds, are partially immune to interest rate threats. These funds are somewhat riskier than liquid funds, nevertheless. When the fund manager includes low-credit rating securities in his investing strategy with the hope of future improvement, he may add credit risk. Additionally, the addition of government securities may cause the fund’s volatility to rise above expectations.
Return
If all other conditions are met, an investor can anticipate returns from ultra short-term funds of roughly 7% to 9%. By comparing this return rate with the various fund categories, you can see that these returns are a little more than what a liquid fund, for example, can bring in over the same one to nine-month time horizon.
These funds are havens for fixed-income investors, but they don’t provide returns that are guaranteed. When interest rates in the economy increase, these funds’ NAV(NAV) often declines. They are therefore appropriate for a system of lowering interest rates.
Cost
An expense ratio is a cost associated with managing your money in very short-term funds. SEBI limits the maximum expense ratio to 1.05%. Long-term holding periods and lower expense ratios will help recoup the money lost due to changes in interest rates compared to liquid funds, given the overall returns provided by these products.
Tax on Gains
Capital gains from investing in these funds could be taxed. The holding period, the length of time you remain invested in this fund, is used to determine the tax rate.
Short-term capital gains are capital profits generated in less than three years (STCG).
Long-term capital gains are those gained over three years or longer (LTCG).
The STCG increases the investor’s income from these funds, and his income bracket determines his tax rate. Taxes on long-term capital gains (LTCG) from these funds are 20% after indexation and 10% without it.
Financial Horizon
The short-term instruments’ coupon is how ultra short-term funds make money. These securities’ prices are subject to daily fluctuations and relatively long maturities. Since they are far more erratic than liquid funds, a brief period may not seem like enough time to produce adequate returns. Due to the higher average maturity of the underlying securities, you need to keep these products for a more extended period than you would with liquid funds.
Financial Targets
These monies are available for a range of uses. These funds may be helpful if you need to set aside money for three- to one year. Furthermore, you could want to use these to move your money to a riskier choice like equity funds.
Put a big sum of money into these funds and start an STP for systematic transfers to equity funds. You might consider them a second haven you can utilize as an emergency fund. If you require regular income, put some of your superannuation funds into them and start a systematic withdrawal plan (SWP).