Best Ultra Short Term Debt funds for short term investment

Best Ultra Short Term Debt FundsBest Ultra Short Term Debt funds for short term investment

If you want to park your money for short term period, generally we invest in bank fixed deposits as they are safer. Alternatively if you can take slight risk, you can invest in other investment options like Ultra Short Term Debt mutual funds and gain more. In this article we would discuss about Ultra Short Term Debt funds, how they operate and how they are tax efficient compared to bank FD’s.

What are Ultra Short Term Debt Funds?

Ultra short term debt funds invest in short term investments like commercial papers certificate of deposits (CD’s), short term bonds etc which matures within a year. The returns on such debt funds are slightly linked to market risk. However, they are regulated and monitored by SEBI to guard the investor’s interest, hence it can be considered as low risk investment option.

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Ultra Short Term Debt Funds Vs Bank Fixed deposits

1) Returns

Ultra Short term debt funds are low risk investments. In the last 1 year, the returns from the top funds are more than 9%, for the last 6 months are more than 4% and returns for the last 3 months are more than 2.2%. However investments in bank fixed deposits yields a return of less than 9% per annum. If you invest for 6 months period, banks are generally offering 6.5% per annum returns which translates to 3.2% for 6 months. Hence investment in Ultra Short term Debt funds is a better investment option than bank FD’s.

2) Tax treatment

The interest on your bank fixed deposits would be added to your taxable income and you need to pay income tax as per your income tax slab. In case of Ultra Short Term Debt funds, necessary dividend distribution tax (DDT) is deducted @ 13.5% of dividends paid. Beyond this, if you sell these funds within one year, short term capital gain needs to be paid by you. However beyond one year, you need to pay long term capital gains @ 10% without indexation @ 20% after indexation.

Comparing to bank fixed deposits, Ultra Short term debt funds are tax efficient.

Best Ultra Short Term Debt funds

We have analyzed some of the best ultra short term debt funds based on below parameters.

1) Crisil Rank-1 and Rank-2 mutual fund schemes under Ultra Short term category.

2) Value Research Fund rating of 4 star and 5 star mutual fund schemes under this category

3) Assets under Management (AUM) greater than Rs 500 Crores which indicates that it gained investor confidence.

4) Funds which has been performing well in 3 months, 6 months and 1 year.

Also read: Should you invest in Global/International Mutual funds?

Best Ultra Short Term Debt funds for short term investment

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Conclusion:  These Ultra Short Term Debt funds are best suitable if you are investing for a short term period. You can expect higher returns if you are falling in high tax bracket as these are tax efficient compared to bank FD’s.

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Suresh
Best Ultra Short Term Debt funds for short term investment

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