Ultra Short Term Debt Funds - Is the category noteworthy?
MF shots - where we try to simplify mutual fund categories. This article is part 3 of Debt mutual fund category. This article focuses on Ultra short term funds which invests for 3-6 month duration.
Estimated time read - 6 minutes
Overview -
The category of Ultra short term fund is widely understood as being similar to liquid funds. But the scheme investment objectives differ by the duration of maturities allowed to be held in liquid & ultra short term fund.
In case you missed out on liquid fund article, you can revisit by clicking here.
Ultra Short term debt funds –
This category invests in debt securities which have maturity ranging from 3-6 months, according to SEBI definition. This category has gathered AUM of Rs. 107,000 crores, which is a considerable sum of money invested in this category. Let’s start understanding it –
Investment Objective –
To invest in securities which have maturity ranging from 3-6 months. It seeks to generate returns similar to returns from other short term funds\ securities.
Suitable for which type of goals -
1. Goals like vacation fund, other short term goals.
2. Money to be parked temporarily which is to be invested in other schemes via systematic transfer plan. (Ultra short term yields more than liquid schemes)
Risk levels –
The risk level is low to moderate. The fund invests in shorter term bonds but also invests in corporate securities in order to enhance returns. These aren’t suitable to invest for goals which have higher duration of 3-5 years as the returns in longer dated securities is higher than shorter term securities.
Screening Parameters –
One should try to combine all these parameters, when comparing alternatives -
1. Expense ratio – The lower the expense ratio, the better for the investors. the average expense ratio for the category stands at 0.29% with Navi mutual fund which is targeting to be low cost passive funds provider having expense ratio of 0.69%.
2. Asset Under Management – as AUM under the scheme rises, the expense ratio is to reduced as per regulatory guidelines.
3. Portfolio maturity – Ensure that the securities held in the portfolio don’t have too long maturities which might affect portfolio at the time of redemption, as was the case with Franklin Templeton
4. Credit ratings of securities held – as the managers try to improve alpha by investing in corporate securities, keep a track whether the fund isn’t taking on excessive risks than necessary.
What to avoid?
1. Don’t get lured by high past returns – the past returns have been good due to declining interest rate environment which added some additional alpha to performance, but going forward one needs to be cautious if the RBI starts increasing rates. Don’t invest based solely on past high returns.
2. Schemes with very high maturities as % of assets – some schemes might have added exposure to longer dated maturities than required.
ITI Short term Duration fund launched in May 2021 is holding RBI paper maturing in 2023 at 15% of NAV (source – Valueresearch)
Conclusion –
These funds majorly invest in shorter (3-6 month) maturities & hence are a better alternative to liquid funds primarily due to slightly higher returns in longer maturities. Each scheme is differentiated due to its maturity of holdings, while some fund managers trying to earn higher alpha by increasingly investing in intermediate maturities (1-3 years) which might be unsuitable for the scheme if given a high allocation. So while you decide which one to pick, try looking at - expense ratio, holdings & maturities of holdings. Also, all the ultra short schemes, haven’t completed their 10 year duration implying the nascent scheme style, but the AUM of 100,000 cr. in the category is noteworthy to look at this category.
In following articles we will focus on each of these debt sub categories –
A. Low Duration Fund –
B. Money Market Fund –
C. Short Duration Fund –
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Notes -
You can download list of all short term debt funds by clicking here.
List of top 10 scheme by lowest expense ratio -
List of top 10 scheme by highest AUM -