Investing is a great way to grow your wealth and achieve your financial goals. However, choosing the right investment vehicle can be a challenge, especially if you're looking for an option that offers both safety and higher returns.
This is where ultra short duration funds come in. Designed for investors with a short investment horizon, ultra-short-duration funds offer a low-risk option that can provide returns higher than traditional fixed income instruments.
In this article, we'll take a closer look at what ultra short duration funds are and why investors should consider them as part of their investment portfolio.
What are ultra short duration funds?
Ultra short duration funds are debt mutual funds that invest in fixed-income securities with a maturity period of up to 6 months. The fund manager invests in a diversified portfolio of short-term debt securities such as commercial papers, certificates of deposit, treasury bills, and other money market instruments.
The fund manager seeks to earn a higher return than a savings account, while also keeping the risk level low. These funds are considered ideal for investors with a short investment horizon of up to 6 months who are looking to park their surplus funds.
Why should investors invest in ultra short duration funds?
There are several reasons why investors should consider investing in ultra short duration funds, including:
Low-risk investment:Ultra short duration funds invest in short-term debt instruments that have a low risk of default. This makes them a relatively safe investment option as compared to equity funds or long-term debt funds.
Higher returns than savings accounts:Ultra short duration funds provide higher returns than savings accounts or fixed deposits. While the returns may not be as high as equity funds, they are higher than the returns on traditional fixed income instruments like savings accounts or fixed deposits.
Liquidity: Ultra short duration funds offer liquidity to investors. Investors can easily redeem their investments within a few days, making it a convenient investment option for those who may need access to their funds in the short term.
Portfolio diversification: Investing in ultra short duration funds can help diversify an investor’s portfolio. Since these funds invest in a diversified portfolio of short-term debt securities, it helps to reduce the overall risk of the portfolio.
Minimal impact of interest rate changes:Ultra short duration funds are less sensitive to interest rate changes as compared to long-term debt funds. This is because the investments are for a shorter duration, and therefore the impact of interest rate changes is minimal.
Who should invest in ultra short duration funds?
Ultra short duration funds are ideal for investors who have a short-term investment horizon of up to 6 months and are looking for a low-risk investment option with relatively higher returns than traditional fixed income instruments like savings accounts or fixed deposits. These funds are also suitable for investors who want to diversify their portfolio by investing in debt securities.
However, investors should note that ultra short duration funds are not risk-free. While the risk is lower as compared to equity or long-term debt funds, there is still a risk of default by the issuer of the debt securities. Investors should always do their due diligence before investing in any mutual fund.