How ultra short term funds fit into your overall portfolio?

When you create a mutual fund portfolio, you should invest in different types of mutual fund schemes for a diversified portfolio. Your mutual fund portfolio should have equity as well as debt exposure and the choice of schemes should depend on your financial goals and investment horizon. If you need to park your surplus funds for a short period of time, investing in equity or long term debt funds would not be feasible. This is where ultra-short term mutual funds come into the picture.

What are ultra-short term mutual funds?

Ultra-short term funds are a type of debt mutual funds which invest their portfolio in debt instruments which have a short maturity period. Usually, the portfolio of ultra short term funds is invested in instruments with a maturity period ranging from 7 days to up to 18 months. Thus, though ultra short term funds are similar to liquid funds, their underlying assets might have a longer maturity period compared to those of liquid mutual funds.

Positioning ultra short term funds in your mutual fund portfolio

As ultra short term funds invest in instruments which have a low maturity period, you can invest in the best ultra short term funds for the following reasons –

1. For short-term investments

Ultra-short term mutual funds can be picked for parking your funds for a short term period, ranging from one to three months or more. If you would need money for fulfilling a short term goal, these funds would be the ideal choice. You can also consider investing in liquid funds as they also offer the facility of parking your surplus funds but their returns are lower than those offered by the best ultra short term funds. Since ultra short term funds have Macaulay duration higher than that of liquid funds, they offer better returns than liquid funds and are suitable for short-term investments.

2. For parking your investments during volatility

Ultra-short term funds can also be a suitable avenue if you are looking to safeguard your equity investments in a volatile market. If the market becomes erratic and starts falling, you can switch your equity investments to ultra short term funds for protecting the returns earned against market volatility. Ultra-short term funds are debt funds which remain unaffected from market volatility. Thus, you can invest in these funds for the time the market is volatile and then switch back into equity when the market stabilizes. This switching would not only protect your equity returns, it would also provide additional returns on the parked money and help your investments grow.

3. For STP or SWP investments

Instead of investing in a lump sum in equity, if you want to invest systematically, you can first allocate your investment in the top-performing ultra short term funds. Thereafter, you can choose the STP (Systematic Transfer Plan) option and gradually invest in equity mutual funds in a systematic manner to avoid market volatility. Alternatively, when withdrawing your investments, you can switch your investments to the top-performing ultra short term funds and then withdraw the investment in a systematic manner rather than in lump sum. This systematic withdrawal would give you additional returns for staying invested and such returns would also be independent of market volatility.

Thus, ultra short term funds can be used for any of the above-mentioned reasons and find a place in your overall portfolio. 

Some of the best ultra short term funds, for your investment needs, are as follows –

Name of the fund	1-year return*	3-year return*	5-year return*
ICICI Prudential Ultra Short Term Fund	7.82%	8.08%	8.77%
PGIM India Ultra Short Term Fund	6.65%	9.44%	8.9%
Aditya Birla Sun Life Savings Fund	7.51%	7.85%	8.15%
SBI Magnum Ultra Short Duration Fund	6.56%	7.58%	7.49%
Kotak Savings Fund	6.76%	7.53%	7.73%

(Returns as on 23rd October 2020)

(Source: https://www.etmoney.com/mutual-funds/debt/ultra-short-duration/56)

To invest in the top-performing ultra short term funds, you can download the ETMONEY App. The ETMONEY App is a mobile application which helps you fulfil all your personal finance needs. Through the app, you can invest in mutual funds, NPS scheme, fixed deposits and also insurance plans. You can also borrow loans for your financial needs. When it comes to mutual fund investments, the ETMONEY App is the best solution as it offers you the choice of the best fund schemes and that too at zero commission rates. 

So, choose the best ultra short term funds for your investments needs and invest in them through the ETMONEY App for the best investment experience.

 

Start your investment journey with ETMONEY

While you toil day in and day out if you don’t save and invest, how would you create funds for your goals? Investments are necessary so that you can create sufficient funds over time to meet your financial goals. When you invest, your investments generate returns on the amount that you put in. These returns grow over time through compounding creating a sizeable corpus. Then, when you need funds to meet your financial goals, this accumulated corpus steps in to fulfil your needs. So, while your goals are your destination, investments are the road to reach it.

To invest, there are different investment avenues available in the market. You can invest in fixed deposits, mutual funds, NPS scheme and also buy insurance policies for financial security. Different types of investments might require you to invest through different platforms. How about cutting down the hassle and investing through one single platform?

The ETMONEY Investment App provides you with a one-stop-shop for buying different types of investment avenues. You can simply download the ETMONEY App on your Smartphone, register yourself and begin your investment journey in the simplest possible way. 

The investment avenues which you can find on ETMONEY Investment App are as follows –

1. Term insurance 

Life throws challenges at your way and in case of premature demise of the bread-winner the family might suffer a considerable financial loss. ETMONEY App, therefore, offers term life insurance plans which help you secure the financial risk of premature death. The application has some of the best term insurance plans which provide a comprehensive scope of coverage at the best premium rates.

2. Health insurance 

Medical costs have become prohibitive and if there is a medical emergency, you might face a considerable financial strain to pay for the expensive cost of treatments. Health insurance plans, therefore, come to your rescue and cover the medical expenses incurred in an emergency. They protect your savings and are a must. The ETMONEY Investment App allows you to compare and find the best health insurance policy for all-round protection and offers such plans at the best premium rates.

3. Car or Bike insurance

If you own a car or a bike you need a compulsory insurance cover on the vehicle. This cover can be found on ETMONEY’s platform. You can buy a car or a bike insurance policy through the application in simple steps.

4. Mutual funds

Mutual funds help you to earn good returns on your investments and also get tax benefits. Moreover, there are different types of mutual fund schemes which you can choose as per your risk appetite and investment needs. ETMONEY App offers you a choice of the best mutual fund schemes for investment. You can choose from equity mutual funds, debt mutual funds, hybrid funds, gold funds, international funds, etc. There is zero brokerage or commission charged by ETMONEY allowing you to allocate the maximum portion of your investment towards the mutual fund scheme and get a high return. You can choose to invest in instalments through SIPs or in a lump sum and even track your investments using the ETMONEY Investment App.

5. NPS scheme

Retirement planning is essential to living a financially independent life even after retirement. So, to allow you to plan for your retirement, the ETMONEY App offers you NPS investment which is a long-term, market-linked retirement oriented scheme. You can open an NPS account online through the application with minimal formalities and paperwork.

Besides these investment avenues, the ETMONEY App also offers loans and credit cards for your financial needs. The application is, therefore, provides you with a unified interface to transact and invest. You can monitor, manage and redeem your investments easily with your Smartphone through the ETMONEY Investment App. So, what are you waiting for? Start your investment journey today so that you can build up a considerable corpus with time. Download the ETMONEY App and choose from the different investment avenues to build up a diversified financial portfolio. 

Factors That Determine the Risk in a Debt Fund

Debt mutual funds are those which are said to have a low risk of market volatility as they invest in fixed income instruments like bonds, deposits and money market instruments. Thus, debt mutual funds are preferred by investors who do not like market risks and want stable returns on their investments. That being said, it is a mistake to believe that debt mutual funds do not carry any risk at all. The returns offered by debt mutual funds are not guaranteed because these funds are also exposed to certain risks. So, when you invest in debt fund online, you expose your investments to such risks. Do you know which risks are associated with debt mutual funds?

Debt mutual funds basically have two types of risks – credit risk and interest rate risk. Let’s have a look at these risks in details –

What is credit risk?

Credit risk is also called default risk. It is the risk of default of realisation of the invested deposit. Debt mutual funds invest in bonds and money market instruments which promise a guaranteed rate of return on investment. These instruments also have a maturity period after which the invested money is returned. If, however, the instruments fail to return the deposit or the interest thereon after maturity, it would be a default and the risk of non-payment of the deposit is called the credit risk or default risk.

Credit risk of a debt instrument is measured by credit rating agencies which rate the instruments based on their repayment capacity. The ratings can be AAA, AAA+, AAA-, B, D, etc. The higher the rating the lower would be the credit risk. Thus, fund managers try and pick debt instruments which have a high credit rating so that the credit risk of the portfolio is minimized. Moreover, if the instrument carries a high credit risk, it would also offer a higher return. So, if you are investing in a debt fund online which has a high return, you should check the credit rating of its underlying assets.

The credit rating of instruments is done periodically and if the rating of an underlying asset falls, the value of the asset also falls, which, negatively impacts the debt fund portfolio.

What is the interest rate risk?

Interest rates on debt instruments are not fixed. They are dynamic in nature which changes with the changing economic conditions. If the interest rates rise in the markets, the market price of the bond falls and vice-versa. Since debt mutual funds invest in bonds, a fall in the bond price reduces the fund’s value and the returns are reduced.  

So, when you are looking for the best debt fund, consider the interest rate risk of the fund vis-à-vis the modified duration. The concept of modified duration is used to measure the price sensitivity of the bond with a specified change in the interest rate. When the change in the rate of interest is multiplied by the modified duration, the expected change in the price of the debt fund can be ascertained. 

To invest in the best debt fund, choose funds whose portfolio has lower weighted average maturity duration. Such funds carry a lower interest rate risk than funds whose portfolios have a longer weighted average maturity duration.

Factors which determine the credit risk and interest rate risk in a debt fund include then following –

• Repo rate – if the repo rates fall, the value of the debt fund portfolio rises

• FII investment – if there is a heavy FII investment in debt instruments, the value of the debt fund portfolio would rise

• Domestic and international economy – economic factors directly impact the interest rates on debt instruments. They, therefore, directly impact the interest rate risk carried by debt mutual funds

Bear in mind these risks inherent in debt mutual funds when you invest in them. To invest in a debt fund online you can download the ETMONEY APP. It is a personal finance app which allows you to invest in the best debt fund. You can compare the performance of different debt fund online through this personal finance app and then choose one which offers the best returns at minimal risks. You can also invest online with minimal hassles at zero commissions and start your debt fund investments instantly. So, know the risks of debt funds and then invest in them through ETMONEY’s personal finance app for ease and convenience.