Ultra Short Duration Funds

What Are Ultra Short Duration Funds? • A type of debt mutual fund that invests in fixed-income instruments. • Portfolio duration is between 3 months to 6 months. • Slightly higher risk and return potential than liquid funds. Where Do They Invest? • Commercial Papers (CPs) • Certificates of Deposit (CDs) • Treasury Bills (T-Bills) • Corporate Bonds • Repo and Reverse Repo agreements Purpose and Suitability • Suitable for investors with an investment horizon of 3 to 6 months. • Good for parking surplus funds for a short term with better yield than savings or liquid funds. • Ideal for investors who can tolerate slightly more volatility than liquid funds. Key Features • Maturity of underlying instruments: Usually more than 91 days, up to 6 months. • Portfolio duration: Minimum 3 months, maximum 6 months (as per SEBI norms). • Returns: Typically in the range of 5% to 7%, depending on interest rate conditions. • Risk: Low to moderate; slightly more sensitive to interest rate changes than liquid funds. • Liquidity: Good; redemption processed in T+1 business day. • Exit Load: Usually zero or very minimal after 3 to 7 days. • No lock-in period Taxation • Short-Term Capital Gain (if held < 3 years): Taxed as per investor’s income tax slab. • Long-Term Capital Gain (if held ≥ 3 years and purchased before April 2023): Taxed at 20% with indexation. • Post-April 2023: Gains taxed as per slab rate if equity holding < 35%. Pros • Higher return potential than liquid funds. • Better suited for short-term financial goals beyond 3 months. • Less volatile compared to long-duration debt funds. Cons • Slightly more sensitive to interest rate movements. • Not suitable for extremely short-term holding (like 1 week). • Returns may fluctuate in volatile rate cycles.