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Who should invest in ultra short-term funds and how?

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As investors continue to search for new ways to grow their portfolios, ultra short duration funds are becoming an increasingly popular investment option. Ultra short-term funds invest in money market instruments with high liquidity and a short maturity period.

With this investment, you can make your surplus funds generate returns instead of keeping them idle in your savings bank account. Because of the short-term nature of the investment, ultra short term funds are considered to be relatively safe. But what type of investors should invest in them, and how? Here is a detailed explanation.

Who should invest in ultra short-term funds?

Most mutual fund advisors believe that ultra short-term funds are suitable for people who want to park their surplus cash for three to six months and need a high degree of liquidity and lower interest rate risk. Besides allowing investors to invest their surpluses for a shorter time, these funds let them use the scheme as a channel for transferring funds to other schemes systematically.

Additionally, investors who have a low risk appetite but want to take advantage of the interest rate changes can go for ultra short term fund investments. To sum up, ultra short-term funds are ideal for investors who prefer:

  • Capital preservation
  • Moderate income generation
  • Low interest rate risk
  • High liquidity
  • Diversification of mutual fund investment portfolio

How to invest in ultra short-term funds?

Investing in ultra short-term mutual funds is paperless and hassle-free with many platforms, including registered banks, offering a digital process. While the terms can vary slightly, the primary steps remain the same.

  • The first step is choosing the website or portal you want to invest in.
  • Then, navigate to the mutual funds’ section and select the ultra short duration fund you intend to invest in. Note that each fund has a different investment objective and risk profile, so make sure to select a scheme that matches your investment goals.
  • After selecting the fund, click on invest.
  • Following that, you may be asked to choose the amount and mode of investment – Systematic Investment Plan (SIP) or lumpsum. Select the mode, provide your KYC details (Aadhaar, bank details, and PAN), and complete your investment.

How are ultra short-term funds taxed?

If you sell your ultra short-term funds before 36 months, the gains are considered Short-Term Capital Gains (STCG). They will be added to your income and taxed depending on the income tax slab that you fall under. For example, if you fall under the 30% tax bracket, your short-term capital gains from these funds would incur a 30% tax plus surcharge.

If you hold the units for 36 months or more and sell then your investments, the gains would be treated as Long-Term Capital Gains (LTCG) and taxed at a rate of 20%. Moreover, long-term capital gains are eligible for indexation benefit, which considers inflation and helps minimise tax liability.

Closing thoughts

Ultra short duration funds can be a reliable solution for your short-term investment needs. But when choosing an ultra short-term fund, it is equally important to consider quantitative and qualitative parameters of the investment along with your financial goals, risk appetite, and investment horizon. This way, you can ensure that you select the best fund for your needs and maximise your returns.

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