What are Ultra Short Duration Funds?
Ultra Short duration funds are open ended debt funds, which primarily invest in debt money and money market instruments of short maturities. According to SEBI guidelines, the Macaulay duration of the portfolios of ultra short duration funds have to be 3-6 months.
Why invest in Ultra Short Duration Debt Funds?
- Generate reasonable returns with sufficient liquidity across all interest rate cycles
- Suitable for investing at any given point of time for short term financial goals
- Low modified duration and average maturity reduces sensitivity of ultra-short term portfolios to interest rate volatility
- Offer higher returns than liquid funds
- Has lower interest rate risk than other debt funds categories except Liquid Funds
- Usually has no exit load
- Focus usually on generating accrual returns by holding their investments till maturity
- May generate higher returns than other debt fund categories with higher maturity profiles during rising interest rate regimes
Table of 10 Best Ultra Short Duration Funds:
| Fund Name | Returns (%) | ||||
| 1 year | 3 year | 5 year | 7 year | 10 year | |
| Aditya Birla Sun Life Savings Fund | 4.57 | 7.06 | 7.17 | 7.79 | 8.34 |
| ICICI Prudential Ultra Short Term Fund | 4.66 | 6.88 | 7.08 | 8.28 | 7.99 |
| HDFC Ultra Short Term Fund | 4.04 | — | — | — | — |
| SBI Magnum Ultra Short Duration Fund | 3.68 | 6.38 | 6.62 | 7.11 | 7.75 |
| IDFC Ultra Short Term Fund | 3.45 | 6.28 | — | — | — |
| Kotak Savings Fund | 3.58 | 6.22 | 6.52 | 7.16 | 7.80 |
| L&T Ultra Short Term Fund | 3.45 | 6.07 | 6.44 | 7.09 | 7.81 |
| Invesco India Ultra Short Term Fund | 3.20 | 5.85 | 6.42 | 7.27 | 7.46 |
| Axis Ultra Short Term Fund | 3.68 | — | — | — | — |
| Tata Ultra Short Term Fund | 3.27 | — | — | — | — |
| Ultra Short Duration Fund Category Average | 3.68 | 5.40 | 5.78 | 6.53 | 7.58 |
(Data as on August 12, 2021: Source: Value Research)
Also Read: Best Corporate Bond Funds
Investment strategies of Best Ultra Short Duration Funds
1. Aditya Birla Sun Life Savings Fund
- Identifies companies with quality managements and strong competitive position in good businesses
- Prefers instruments consistently generating superior yields at lower risk
- Uses liquidity as a key driver during stock selection
- May also hold cash depending on market conditions
- Can review its investment strategy based on interest rate outlook and asset liability management
2. ICICI Prudential Ultra Short Term Fund
- Identifies securities offering optimal level of returns considering the risk-reward ratio
- Restricts government securities allocation towards to limit volatility
- Prefers well researched investment-grade debt instruments
- Follows a rigorous process to spot mispriced credit opportunities and thereby, enhance yield with controlled risk
- Aims to generate accrual income by taking ‘hold till maturity’ approach in corporate bonds
3. HDFC Ultra Short Term Fund
- Focuses on superior credit quality and accrual income
- Maintains high exposure to AAA / A1+ or equivalent rated securities
- Attempts to optimize Yield to Maturity (YTM) while maintaining a portfolio of superior credit quality
4. SBI Magnum Ultra Short Duration Fund
- Aims to generate regular income with high degree of liquidity
- Objective is to provide attractive risk-adjusted returns
- Undertakes active management of interest rate risk and credit risk of its portfolio
5. IDFC Ultra Short Term Fund
- Follows a low risk strategy to generate stable returns
- Invested 100% in debt instruments with AAA and equivalent ratings as on June 30, 2020
- Proportion of various fixed income instruments may vary from time to time on the basis of interest rates, inflation, market conditions, liquidity and other macroeconomic conditions
6. Kotak Savings Fund
- Seeks to generate stable returns with reduced interest rate risk
- Selects the maturity profile of debt instruments on the basis of rating, interest rate outlook and market conditions
- Security selection guided but not restrained by the ratings of various rating agencies
7. L&T Ultra Short Term Fund
- Aims at generating attractive yield without taking excessive interest rate risk
- Invested in high quality A1+ & AAA rated securities with average maturity of 160-165 days as on June 30, 2020
- Considers yield, tenure, liquidity, credit rating and value added features during securities selection
8. Invesco India Ultra Short Term Fund
- Actively managed fixed income scheme investing in securities offering superior yields
- Prefers accrual strategy and holds securities till their maturity
- Invested in AAA/A1+ rated securities as on June 30, 2020
- Retains the flexibility to invest 100% of its portfolio in money market instruments
- Makes securities selections on the basis of exhaustive credit risk analysis through in-house credit appraisal process
- Avoids interest rate directional calls to eliminate interest rate risk as on June 30, 2020
- Attempts to cash in on capital gain opportunities arising from the rolling down of residual maturity of its portfolio constituents
9. Axis Ultra Short Term Fund
- Predominantly invests in a mix of corporate bonds (50%+) and money market instruments
- Invests primarily in A1+ rated securities
- Aims at capturing higher carry by up to 30% exposure in non-AAA rated securities
- Exposures to AA assets aimed at earning around 100-150 bps spread over Certificate of deposits
- Follows pure accrual strategy with buy and hold approach
- Does not take active duration calls in lower rated papers
- Takes cautious approach while selecting sectors and adheres strictly to issuer/rating limits
10. Tata Ultra Short Term Fund
- Makes securities selection on the basis of fundamental research and objective analysis
- Prefer good quality papers on the basis of quantitative and qualitative filters
- Invests in securities rated investment grade by credit rating agencies
- Also invests in unrated securities believed to be at par with investment-grade securities by the Fund Manager
- Undertakes in-house research on credit analysis to determine credit risk
- Follows a top down approach after factoring in interest rate outlook, systemic liquidity, RBI’s policy stance, term structure of interest rates, inflationary expectations, fiscal deficit, currency movements, global interest rates and Government borrowing program
Risks of investing in Ultra Short Duration Funds
Investments in ultra short term debt funds are subjected to various risk factors associated with investments in debt and money market instrument such as:
- Delinquency and Credit Risk
- Currency Risk
- Interest Rate Risk
- Imperfect hedge using interest rate futures
- Liquidity risk
- Reinvestment risk
Also know: Short Duration Funds vs Ultra Short Duration Funds vs Liquid Funds vs Fixed Income
Who should invest in Ultra-Short Duration Funds?
- Investors with moderate risk appetite seeking regular income with a high degree of liquidity and lower interest rate risk
- Those wishing to park their short term surpluses
- Those seeking to save for their short term financial goals with investment horizons of 2-6 months
- Those seeking to invest in equity and hybrid funds through Systematic Transfer Plans (STP)
- Those seeking to park their emergency funds
- Those seeking higher returns than savings accounts and short term fixed deposits
2 Comments
Please guide me if the below MF is a good investment in 2-3 years: I am new to investments in MF;
ICICI Prudential Balanced Advantage Fund – Direct Plan – Growth
Hi Rajesh,
ICICI Prudential Balanced Advantage Fund is a dynamic asset allocation fund. Being an equity oriented fund, one should ideally remain invested in it for an investment horizon of at least 5 years. For investment horizon of 2-3 years, I will suggest you to invest in ultra-short, short or low duration funds depending on your risk appetite. You can read this article ‘https://www.paisabazaar.com/mutual-funds/balanced-advantage-funds/’ to know more about Balanced Advantage/Dynamic Asset Allocation funds.