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.