Ultra Short Term Funds

Sometimes we may not need instant access to our money. At the same time we may not want to lock our money into a long term investment because we might require it in the near future.
Ultra Short Term Fundis designed for such short-term requirement, as it enables deploying of funds for shorter periods of time, from 3 to 6 months, to generate regular income while cautiously monitoring the rate of interest.

What are Ultra Short Term Funds?

Ultra Short Term Funds are mutual fund schemes that invest in debt and money market instruments of short maturities. Unlike liquid funds, Ultra Short Term Funds can invest in securities of maturity longer than 91 days, but there is no compulsion to do the same. Money is invested in Treasury Bills, Commercial Paper, Certificate of Deposit and Non-Convertible Debentures.
Ultra Short Term Funds are positioned between liquid funds and short term funds with respect to risk-return matrix and can maintain a higher average maturity. This offers USTs theflexibility to enhance yields in various short term yield curve scenarios (e.g. inverted, steep, linear etc)

Features of Ultra Short Term Funds

• Returns: Normally, the longer the maturity of the instrument, the higher is the yield on that instrument (time value of money). Ultra Short Term Funds can invest in securities with maturity of more than 91 days.This leads to a higher accrual income on the portfolio vis-a-vis liquid funds.
• Risk: Ultra Short TermFunds invest in instruments that have a longer maturitythan liquid funds, they are exposed to some interest rate risk. However, the component of securities with residual maturity more than 91 days is maintained on the lower side, so that the volatility in returns is limited. Low duration ofthese funds can help an investor take advantage of rising rates by re-investing at higher yields.
• Liquidity: Being an open ended scheme, units in Ultra Short TermFunds can be sold at any time without regard to bond maturities.
• Taxation: As per tax rates applicable for Individual/HUF for FY2013-14, applicable from Jun 1, 2013.Dividend Distribution Tax (DDT): Dividends are tax free in the hands of investors. However, fund houses need to pay dividend distribution tax of 28.325% (25%+10% surcharge+3% Cess) at source.Short Term Capital Gain (STCG): Investment for a period of upto12 months qualify for short-term capital gains. STCG is taxed at marginal rate of taxation.Long Term CapitalGain (LTCG): Investment for a period of more than 12 months qualify for long-term capital gains. LTCGis 10% without indexation or 20% with indexation whichever is lower, Plus 10% surcharge plus 3% cess.

Outlook

Interest rates at the short end currently are at 11.41% and 12.13% for 3months CD and CP respectively. The 91 Days and 364 Days treasury bills closed at 10.78% and 10.05% on 23-Aug'13. Investing at these elevated yields will ensure highaccrual income on the short term savings.

Who should invest?

Ultra Short term funds are suited for investors who have a short investment horizon (3 months to 6months), wants to optimize returns on surplus cash and seek high level of liquidity for their investments.