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Ultra short term mutual funds are one of the popular options for investors seeking to park their funds for a shorter duration while making significant returns. These funds are also less volatile in nature, making them a suitable option for risk-averse investors. 

What are Ultra Short Term Funds?

These are debt mutual funds for a relatively short horizon. You can invest for 3-12 months, based on your preference.


Generally, these funds invest in debt and money market securities, making them less riskier than several other types of mutual funds. That said, these funds are comparatively riskier with respect to liquid funds.


Given the nature and investment of these funds, they generate a comparatively stable income, making them ideal for low-risk investors.

How do Ultra Short Term Funds Work?

Also known as ultra short duration funds, these funds work similarly to other mutual fund schemes. Here, the fund manager invests the pooled money into debt and money market securities. Based on the performance of the instruments they select, you get the returns. Typically, you get returns via 2 methods:

  • Interest Payouts

This is based on the coupon rate provided by the instrument in which the fund manager invests. These instruments include treasury bills, bonds, and certificates of deposits, among others. Interest payouts are provided at fixed intervals.

  • Profit from Trading Securities

Another way is the profit generated through purchasing or selling individual securities in the debt or money market. Profits from trading these securities depend on the performance of the individual investments. 

Pros of Ultra Short Term Funds

Here are some of the top benefits of ultra short duration mutual funds:

  • Short Investment Tenor

An attractive feature of these funds is that they come with a shorter investment duration, generally up to 1 year. This short duration makes it an ideal choice if you want to avoid investing for longer periods. 

  • Expense Ratio

The expense ratio affects your returns because you pay it from your returns. As such, a higher ratio would have a negative impact and vice-versa. Generally, ultra short duration funds have a comparatively lower expense ratio, allowing you to get maximum returns. 

  • High-Quality Instruments

Ultra short term funds invest in highly rated debt and money market securities. Hence, the risk associated with these funds is comparatively low. 

Cons of Ultra Short Term Funds

Like every debt fund, ultra short duration funds are market-linked schemes and, therefore, carry some risk. These risks are related to credit, interest rate, and liquidity, all of which would ultimately impact your returns.

Things to Consider When Investing in Ultra Short Term Funds

Here are some factors you must consider while investing in ultra short duration funds.

  • Risks and Returns

As mentioned, these funds carry a certain degree of risk. As such, you need to consider this and ensure it aligns with your goals and risk tolerance. You also need to choose a fund accordingly, as not all ultra short duration funds would have investments in the same instruments. Remember to compare different options to ensure you choose the best one.

  • Investment Objectives

Before finalising an investment, assess your investment objectives, preferred investment duration and risk appetite. Then, check if the fund aligns with your requirements. Ideally, these funds are more suited for risk-averse investors looking to invest for a shorter term. 

  • Investment Cost

When investing in ultra short duration funds, you need to pay the expense ratio and other charges. The expense ratio impacts your returns, so choose a fund that aligns with your requirements and has a low expense ratio. 

  • Taxation 

Ultra short term funds are treated as non-equity investments. The tax implications on these mutual funds depend on the holding period. The returns will be treated as short-term capital gains (STCG) if you hold the units for 3 years or less. Here, the taxation is as per the income tax slab you fall under. 


In case you held them for 3 years or more, the returns are considered long-term capital gains (LTCG). These capital gains are taxed at 20% after indexation. Without indexation, LTCG gets taxed at 10%.

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Who Should Consider Investing in Ultra Short Term Funds

Ultra short duration funds can be suitable for investors who prefer a short investment period and have a low-risk appetite. You must consider this option if you want to benefit from high liquidity and leverage the movement of market interest rates. 


You can start investing with a small amount and earn better dividends than a regular liquid fund. However, remember to choose a fund that meets your current and future needs.


As evident, ultra short duration funds offer a great way to earn returns on your idle funds. You can start your investment journey without any hassles on Bajaj Markets. You can choose from a plethora of options in mutual funds


Moreover, the investment process is pretty straightforward and entirely digital, allowing you to invest in just a few taps. Also, you need to provide minimal documentation, making the process quicker, simpler, and easier. 

FAQs on Ultra Short Term Funds

What is the ideal investment horizon for ultra-short-duration funds?

The ideal investment duration for these funds is 3 to 12 months.

What is the risk level associated with ultra-short-duration-funds?

These funds have a lower level of risk due to their short investment horizon.

Do ultra-short-term mutual funds provide guaranteed returns?

Returns from short-term mutual funds depend on the performance of the underlying securities.

Can I invest in ultra-short-duration funds through an SIP?

Yes, you can invest in these mutual funds via a systematic investment plan (SIP).

What is an ultra-short-term fund?

This is a short-term debt fund with a relatively short timeline varying between 3 and 12 months.

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