Best Ultra Short Term Funds Based on 5Y CAGR (2025)
Ultra short duration mutual funds in India offer a blend of modest returns and low risk, making them an attractive option for investors with short-term financial goals. With a quick exit strategy without compromising the safety of capital, ultra short-term funds are preferred over long-duration mutual funds. In this blog, we will delve deeper into identifying the best ultra duration funds, while exploring the advantages and risks associated with investing in these debt mutual funds.
Best Ultra Short Duration Funds Based on 5Y CAGR
| Fund Name | AUM (Rs. in cr) | Expense Ratio (%) | 5Y CAGR (%) |
|---|---|---|---|
| Nippon India Ultra Short Duration Fund | 7,666.37 | 0.38 | 7.00 |
| UTI Ultra Short Duration Fund | 3,448.00 | 0.33 | 6.59 |
| ICICI Pru Ultra Short Term Fund Fund | 13,813.18 | 0.39 | 6.37 |
| Aditya Birla SL Savings Fund | 16,797.94 | 0.34 | 6.29 |
| Axis Ultra Short Duration Fund | 5,681.17 | 0.36 | 6.13 |
| HDFC Ultra Short Term Fund | 14,735.24 | 0.37 | 6.11 |
| Tata Ultra Short Term Fund | 4,964.54 | 0.30 | 5.98 |
| Mahindra Manulife Ultra Short Duration Fund | 224.76 | 0.27 | 5.98 |
| Kotak Savings Fund | 13,150.62 | 0.37 | 5.96 |
| PGIM India Ultra Short Duration Fund | 197.09 | 0.31 | 5.92 |
Disclaimer: Please note that the above table is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing. The data is derived from Tickertape Stock Screener and is subject to real-time updates.
Note: The data on the top ultra short term funds is from 18th February 2025 is derived from Tickertape Mutual Fund Screener using the following filters:
- Plan: Growth
- Category: Ultra Short Duration Funds
- CAGR 5Y: Sorted from Highest to Lowest
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Top Ultra Short Term Funds in India: An Overview
Nippon India Ultra Short Duration Fund
Nippon India Ultra Short Duration Fund concentrates on debt instruments with shorter tenures, aiming to offer a steady stream of income and limited price fluctuations. The fund management keeps track of economic indicators and adjusts the blend of assets, which may include money market tools and shorter-maturity corporate bonds. This approach helps lower the effect of sudden rate swings on the portfolio.
UTI Ultra Short Duration Fund
UTI Ultra Short Duration Fund invests primarily in assets such as treasury bills and short-term corporate notes, maintaining an average maturity that is intended to be on the lower side. The team reviews interest rate movements to determine how long they will hold various debt securities. Diversifying across different types of issuers further aids in controlling risk, aiming for stable returns rather than wide fluctuations.
ICICI Pru Ultra Short Term Fund
ICICI Pru Ultra Short Term Fund allocates its resources across a variety of short-term instruments, including commercial paper and certificates of deposit. The goal is to keep the portfolio flexible enough to handle changes in interest rates while striving to protect the principal amount over time. The team conducts ongoing checks of each issuer’s capacity to meet debt obligations, aiming to lower the chances of credit mishaps.
Aditya Birla SL Savings Fund
Aditya Birla SL Savings Fund places a large portion of its capital in lower-duration securities to deliver stable interest income with limited fluctuations. The management takes into account the market’s liquidity and shifting interest rate outlook when deciding how to allocate resources. By spreading its assets across various issuers and sectors, the fund hopes to minimize the impact of any single credit event.
Axis Ultra Short Duration Fund
Axis Ultra Short Duration Fund focuses on acquiring short-term bonds and money market holdings that offer a balance between income generation and capital steadiness. The fund regularly looks at key market indicators, such as inflation trends and rate policies, to position its average maturity. It spreads its holdings among multiple issuers, keeping credit quality in check through thorough assessments of a company’s finances and repayment track record.
HDFC Ultra Short Term Fund
HDFC Ultra Short Term Fund invests mostly in instruments with a short time to maturity, aiming to limit large changes in value. The fund’s focus is on ensuring liquidity and preserving the principal while still offering an avenue for interest-based gains. In deciding what to purchase, the team studies economic indicators and the track record of each issuer. By limiting exposure to lower-quality issuers and monitoring credit health, it seeks to reduce potential risks for investors.
Tata Ultra Short Term Fund
Tata Ultra Short Term Fund dedicates its portfolio to short-term assets, including commercial paper and corporate bonds with shorter maturities. The emphasis on shorter durations enables swift adjustments in response to varying market settings. Through a systematic assessment of each issuer’s financial position, the fund attempts to stay clear of excessive default risks. Its allocation process also keeps in mind the need for stable interest gains, seeking to preserve the principal in the meantime.
Mahindra Manulife Ultra Short Duration Fund
Mahindra Manulife Ultra Short Duration Fund balances its allocation between various short-term debt options, focusing on instruments that offer regular interest payments. By analysing economic data and possible rate shifts, the fund makes changes to its average maturity when necessary. It also pays attention to diversifying across different issuers, aiming to reduce concentration-related concerns.
Kotak Savings Fund
Kotak Savings Fund seeks to accumulate returns through short duration instruments, such as certificates of deposit and short-dated bonds. The fund’s managers keep track of market trends, including shifts in liquidity and policy rates, to decide on the appropriate balance of holdings. By selecting issuers with adequate credit backgrounds, the fund aims to manage risks that come from potential defaults.
PGIM India Ultra Short Duration Fund
PGIM India Ultra Short Duration Fund concentrates on instruments that mature relatively quickly, aiming to maintain a stable net asset value and ensure fluid movement of capital. The research team studies an issuer’s finances and repayment ability before making additions to the portfolio. An eye is also kept on prevailing market indicators to adjust the overall duration, balancing the aim for higher yields with the need to manage volatility.
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What is Ultra Short Duration Mutual Fund?
Ultra Short Duration Mutual Funds are debt funds that invest in securities with maturities typically between 3 to 6 months. They aim to provide liquidity and reasonable market-related returns, with lower risk and higher liquidity, by investing in a debt and money market instruments portfolio.
How to Invest in Ultra Short Term Funds?
Here are the key steps to invest in Ultra Short-Term Mutual Funds in India:
- Choose a Reputable Fund House: Select an asset management company (AMC) with a strong track record and a diverse range of ultra short-term fund options.
- Understand Your Investment Horizon: Ultra short-term funds are suitable for investment horizons ranging from 3 months to 1 year. Align your investment timeline with your financial goals.
- Assess Your Risk Tolerance: Ultra short-term funds are considered low-risk compared to other debt funds but still carry some interest rate and market risks. Ensure the fund’s risk profile matches your risk tolerance.
- Complete the KYC Process: If you are a new investor, complete the Know Your Customer (KYC) process by submitting the required documents and verifying your identity.
- Open a Demat and Trading Account: If you don’t have one already, open a Demat and trading account with a broker or directly with the AMC to facilitate your investments.
- Invest & Monitor: Once your account is set up, you can invest in the chosen ultra short-term fund either through a lump sum or via a Systematic Investment Plan (SIP). If necessary, consider rebalancing your portfolio to align with your investment objectives.
Who Should Invest in Ultra Short Term Funds?
Ultra Short Duration Mutual Funds could be suitable for various investors based on several factors. Here are some types of investors who may consider putting their money into these funds:
- Short-term Investors: Ideal for those looking to invest for a period ranging from 3 to 12 months.
- Investors seeking better returns than savings accounts: Suitable for investors who want to earn higher returns without significantly increasing their risk profile.
- Conservative Investors: Those who prefer low-risk investments and wish to avoid the volatility of the equity markets might find these funds appealing due to their lower risk profile compared to longer-duration debt funds.
- Lump Sum Investors: Investors who have received a lump sum amount, like a bonus or a windfall gain, and wish to park this amount for a short duration could opt for these funds.
- Emergency Fund Allocators: Those who want to set aside an emergency fund that can be easily liquidated may choose Ultra Short Duration Funds for their high liquidity.
Remember that while these funds are relatively low risk, they are not entirely free from risks such as credit risk and interest rate risk, and they may offer modest returns compared to long-term investment options. It’s always recommended to align investment choices with personal risk tolerance, investment horizon, and financial goals.
Factors to Consider While Investing in Ultra Short Term Funds in India
When considering an investment in ultra short term funds in India, several key factors should be evaluated to ensure that the fund aligns with your financial goals, risk tolerance, and investment horizon. Here are some important factors to consider:
- Investment Objective: Ensure the fund’s investment objective matches your financial goals. Ultra-short-term funds are suitable for investors looking to park surplus cash for a short period, typically between three months and a year, with relatively lower risk and better returns than regular savings accounts.
- Risk Profile: Assess the risk associated with the fund. While ultra short term funds are generally considered lower risk than longer-term debt funds, they still carry interest rate risk, credit risk, and market volatility. Understanding these risks and how they align with your risk appetite is crucial.
- Credit Quality of Portfolio: Check the credit quality of the assets included in the fund’s portfolio. Funds investing in higher-rated securities (AAA-rated) are generally safer than those investing in lower-rated securities. Higher credit risk could lead to higher returns but also increase the potential for default.
- Fund Performance: Evaluate the historical performance of the fund across different market conditions. While past performance is not indicative of future results, it can provide insights into how the fund manager has navigated various economic scenarios.
- Expense Ratio: The fund’s expense ratio is the annual fee the fund house charges for managing the money. A lower expense ratio can significantly impact net returns, especially in a low-interest rate environment.
- Liquidity: Ultra short term funds are generally liquid, but it’s important to understand any exit load or charges that may apply if you withdraw your investment before a certain period.
- Fund Manager’s Expertise: The fund manager’s experience and expertise are critical to managing the portfolio effectively, especially in choosing the right securities and managing risks. Review the fund manager’s track record and approach to managing the fund.
- Interest Rate Outlook: Since ultra-short-term funds can be affected by interest rate movements, understanding the current and expected future interest rate environment can be helpful. If interest rates are expected to rise, shorter-duration funds may be less affected than longer-duration funds.
- Reinvestment Opportunities: Consider the potential for reinvestment of returns. Reinvesting the proceeds at comparable yields might be challenging in a declining interest rate environment.
- Tax Implications: Understand the tax implications of your investment. The returns from ultra short term funds are taxed as per the income tax slab for holdings less than three years (short-term capital gains) and at 20% with indexation for holdings more than three years (long-term capital gains).
Features of an Ultra Short Duration Mutual Fund
Ultra Short Duration Mutual Funds are debt funds that invest in a mix of debt and money market instruments with the aim of providing investors with a balance of low risk and moderate returns. Here are the key features of these funds:
- Invest in debt and money market instruments: These funds allocate their assets across various debt securities and money market instruments to achieve their investment objectives.
- Macaulay Duration of the portfolio is 3 to 6 months: The Macaulay Duration, which is the weighted average term to maturity of the cash flows from the portfolio, ranges from 3 to 6 months for these funds.
- Suitable for short-term investments: Given their short investment duration, these funds are ideal for investors with short-term financial goals or those looking to park surplus funds for a brief period.
- Less volatile compared to longer duration funds: The short duration of the underlying securities makes these funds less sensitive to interest rate changes, thus reducing volatility.
- Offer better returns than traditional savings accounts: Ultra Short Duration Mutual Funds typically provide higher returns than savings accounts due to their ability to invest in instruments that yield more than the average savings rate.
Difference Between Liquid and Ultra Short Funds
The primary difference between liquid funds and ultra short-term funds lies in the maturity of the underlying securities they invest in. Liquid funds invest in debt instruments with a maturity of up to 91 days, while ultra short-term funds have a slightly longer investment horizon, investing in securities with maturities ranging from 3 to 6 months. This difference in maturity leads to liquidity, returns, and risk profile variations between the two fund categories.
Liquid funds offer higher liquidity compared to ultra short-term funds, with some fund houses even providing instant redemption facilities. However, ultra short-term funds have the potential to generate slightly higher returns due to their longer investment horizon, albeit with marginally higher risk. Both fund categories are considered low-risk investments suitable for short-term financial goals, with returns comparable to savings account rates.
Risks Involved While Investing in Ultra Short Term Funds in India
Like any investment, investing in ultra short term funds in India involves certain risks. These funds typically invest in debt securities with short maturities, and while they are generally seen as safer and more stable than long-term investments or equities, there are still several risks to consider:
- Interest Rate Risk: This is a primary risk for any debt fund, including ultra short term funds. Changes in interest rates in the economy can affect the price of the bonds these funds hold. Typically, when interest rates rise, bond prices fall, and vice versa. However, because ultra short term funds invest in securities with shorter durations, their sensitivity to interest rate changes is relatively lower compared to medium or long-term debt funds.
- Credit Risk: Refers to the risk of the bond issuer defaulting on its obligations, which can lead to losses for the fund. Ultra short-term funds might invest in commercial papers, certificates of deposits, corporate bonds, and other debt instruments that can vary in credit quality. A lower credit rating indicates higher risk.
- Liquidity Risk: Although ultra short term funds are generally quite liquid, certain securities within the fund’s portfolio may face trading issues. This can happen if the market for a particular security dries up, making it difficult for the fund to sell such securities without incurring a loss.
- Market Risk: These funds are subject to market fluctuations, even if these are usually less severe due to the short maturity of the assets. Macroeconomic factors, government policy changes, or economic environment shifts can influence market movements and affect the fund’s performance.
- Reinvestment Risk: Occurs when the returns from the fund’s investments have to be reinvested in other securities with lower yields. This is particularly a concern in a falling interest rate environment.
- Operational Risk: This includes risks arising from errors in processing, technology failures, and issues related to fund management.
Due to these risks, while ultra short term funds are generally considered less risky compared to other types of mutual funds, they are not entirely free from risk. Investors should consider their own risk tolerance, investment horizon, and other financial goals when investing in these funds. It’s also useful to review the fund’s portfolio to understand its exposure to different types of risks.
Advantages of Ultra Short Duration Mutual Funds
Investing in Ultra Short Duration Mutual Funds offers several advantages, especially for those looking to park their funds for a short period. Here are some of the benefits of investing in these funds:
- Short Investment Horizon: These funds are ideal for investors with an investment horizon of around 6 months to 1 year. They can serve as a good investment vehicle for short-term financial goals.
- Diversification: For investors with exposure to equity or other high-risk instruments, Ultra Short Duration Funds can provide diversification. Diversification can help reduce the overall risk of an investment portfolio.
- Low-interest Rate Risk: The short maturity of the investments minimises the fund’s exposure to interest rate fluctuations.
- Better Liquidity: These funds may offer higher liquidity than longer-term investment options, making them suitable for investors needing access to their funds on short notice.
- Potentially Higher Returns: They aim to provide higher returns than savings accounts and very short-term fixed deposits.
- Suitable for Conservative Investors: These funds may be appropriate for investors with a low-risk appetite and a short investment horizon.
How to Calculate Returns on Ultra Short Duration Mutual Funds?
To calculate the returns on Ultra Short Duration Mutual Funds, you can use the annualised return formula:
Annualised Return = (Ending NAV – Beginning NAV + Distributions) / Beginning NAV)^(365/number of days held) – 1
Where:
- NAV stands for Net Asset Value
- The term “Ending NAV – Beginning NAV + Distributions” represents the total return over the investment period
- “Beginning NAV” is the Net Asset Value at the start of the investment period
- “Distributions” include any payouts such as dividends or interest received during the investment period
- “365/number of days held” is used to annualise the return based on the actual number of days the investment was held.
Taxability on Ultra Short Duration Mutual Funds
In India, the taxability of returns from ultra short duration mutual funds depends on the nature of the returns and the duration for which the investments are held. Here’s how it works:
Dividend Income: If you receive dividends from your ultra short duration mutual fund, the fund house pays a Dividend Distribution Tax (DDT) before distributing them. However, as of April 2020, dividend income from mutual funds is added to the investor’s total income and taxed according to their applicable income tax slab rates.
Capital Gains: The tax on the capital gains from ultra short duration mutual funds depends on the holding period:
- Short-term capital gains: If the investment is held for less than 36 months, gains are taxed according to the investor’s income tax slab rate.
- Long-term capital gains: For investments held for more than 36 months, gains are taxed at 20% with indexation benefits.
To Wrap It Up…
Ultra Short Duration Mutual Funds are a strategic investment choice for those seeking a low-risk option with liquidity and the potential for modest returns. They are particularly suitable for short-term financial objectives and for investors who wish to maintain a conservative investment profile. Therefore, evaluating the above-mentioned factors can help you make a more informed decision when investing in ultra short term funds, while mitigating risk.
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Frequently Asked Questions(FAQs) on Ultra Short-Term Funds
Based on the 5-yr CAGR, here is a list of the top 5 ultra-short duration mutual funds that you can consider investing in India 2024:
(a) PGIM India Ultra Short Duration Fund
(b) ICICI Pru Ultra Short-Term Fund
(c) Aditya Birla Sun Life Savings Fund
(d) Axis Ultra Short-Term Fund
(e) HDFC Ultra Short-Term Fund
Note: This information is intended for educational purposes and should not be construed as a recommendation or advice.
Ultra Short Duration Mutual Funds invest in debt and money market instruments with maturities ranging from 3 to 6 months, targeting financially strong borrowers and government securities.
Ultra-short funds do not have a lock-in period, but they are ideal for investment horizons of 6 months to 1 year.
Ultra Short Duration Mutual Funds may have an exit load, which varies depending on the fund’s policy and the holding period.
Ultra Short Duration Mutual Funds are considered low-risk due to their short lending duration, but they carry slightly higher risk than liquid funds.
