{"id":9931,"date":"2016-09-21T11:28:42","date_gmt":"2016-09-21T05:58:42","guid":{"rendered":"https:\/\/blog.fundsindia.com\/blog\/?p=9931"},"modified":"2018-02-20T21:47:48","modified_gmt":"2018-02-20T16:17:48","slug":"fundsindia-views-ultra-short-term-funds-what-they-are-and-when-to-use","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/advisory\/fundsindia-views-ultra-short-term-funds-what-they-are-and-when-to-use\/9931","title":{"rendered":"FundsIndia views: Ultra short-term funds \u2013 what they are and when to use"},"content":{"rendered":"

Many of you may be familiar with liquid funds. You may either be parking your surplus in them or using them for systematic transfer into equity funds. Another category of debt funds, called ultra-short-term funds (sometimes called liquid-plus funds) are often used interchangeably with liquid funds. However, there is quite a bit of difference between liquid funds and ultra-short-term funds (UST). One cannot be a substitute for the other and here\u2019s why.<\/span><\/p>\n

What they are<\/strong><\/p>\n

UST funds are very short-term debt funds that seek to invest in a combination of certificates of deposits, treasury bills, commercial papers as well as corporate bonds with average maturity that range from 6 months to 1 year in most cases. To understand how UST funds are different, let us first discuss a little about liquid funds.<\/span><\/p>\n

Average maturity:<\/strong> Liquid funds hold a highly liquid portfolio of debt instruments, \u00a0typically \u00a0till maturity. The income they earn is from the coupon (interest) on the underlying instruments. The average maturity of the instruments they hold does not exceed 91 days.<\/p>\n

In other words, the maximum maturity of the underlying investments will be less than 3 months. In such funds, the change in the daily NAV would primarily be by way of the daily interest (coupon) accruing on the various instruments it holds. There would be no mark-to-market or volatility in price on most occasions (except in exceptional circumstances where liquid funds are asked to re-value their instruments when debt markets crash; July 2013 being a case in point).<\/p>\n

UST funds also hold short-term instruments and predominantly earn from the coupon. They however, have a longer maturity and may hold instruments that are mark to market \u2013 whose prices may change on a day-to-day basis. To this extent they are much more volatile than liquid funds, especially in the short term, say 1-3 months. For instance, nearly half the universe of UST funds has shown a period of negative returns even over a one-month time frame. This clearly indicates they are not meant for the short term.<\/p>\n

A higher average maturity for UST funds means that you need to hold them for longer periods than you would hold a liquid fund.<\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t
 <\/th>Liquid funds<\/th>Ultra short term funds<\/th>\n<\/tr>\n<\/thead>\n
Average maturity of instruments held<\/td>Less than 91 days<\/td>Can hold instruments with longer maturity<\/td>\n<\/tr>\n
Risk<\/td>Low risk<\/td>Higher risk than liquid funds<\/td>\n<\/tr>\n
Return<\/td>Returns higher than savings bank interest<\/td>Returns typically higher than liquid funds<\/td>\n<\/tr>\n
Min. holding period<\/td>Any time frame but ideally at least 2 weeks<\/td>Minimum 3 months<\/td>\n<\/tr>\n
Exit Load<\/td>No exit load<\/td>Some funds carry exit load<\/td>\n<\/tr>\n
Taxation on sale<\/td>Gains on units held for less than 3 years \u2013 taxed at slab rate
\nGains on units held for over 3 years - 20% tax with indexation benefit on cost<\/td>		Same as liquid funds<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

Nature of instruments and risk: <\/b>Liquid funds mostly hold treasury bills and some certificates of deposits. UST funds hold a combination of various short-term instruments that include AAA and even AA-rated bonds.<\/p>\n

However, there is a wide variance in the nature of instruments that UST funds invest in. Just to give you an illustration: on one end you have funds such as Franklin India Ultra Short Fund<\/a> with a high proportion of investments in AA-rated bonds and with an average maturity exceeding 300 days; on the other end there are funds such as Axis Treasury Advantage<\/a> with almost half the above-mentioned average maturity and loaded more with commercial papers and AAA-rated instruments. As a result, the return differential between the funds will also be high.<\/p>\n

To this extent, this risk profile (and therefore their return potential) of UST funds is slightly higher than that of pure liquid funds.<\/p>\n

With liquid funds, the investible universe is by and large the same and hence you will not have much variance in the performance of funds within the category.<\/p>\n

Exit load: <\/b>Exit load is a way of indicating to the investor that he\/she has to hold the fund for a minimum time frame. Liquid funds do not have any exit load as they are meant to be \u2018any time money\u2019. However, some UST funds do carry an exit load if you redeem them within a short period. This period varies from fund to fund.<\/p>\n\n\n\n
Five ways to use UST funds<\/b><\/p>\n
    \n
  1. Park money that you need in the next 3 months to a year<\/li>\n
  2. Use it as a substitute for very short-term bank deposits of 90 or 120 days<\/li>\n
  3. Use it to park money that you will need for paying your insurance premium or school fee if such need is at least a good 6 months away<\/li>\n
  4. Use it along with liquid funds to build an emergency fund<\/li>\n
  5. Park a part of your retirement portfolio in UST funds (along with other categories of debt funds such as short-term and income funds) and use it to generate monthly income by way of systematic withdrawal plan<\/li>\n<\/ol>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

     <\/p>\n

    Do not treat UST funds as a substitute for your savings bank. Liquid fund is a safer option. Use it along with other higher yielding options like short-term debt fund or dynamic\/income fund to build a debt portfolio. You will thus diversify your debt portfolio with the right mix of liquidity and return.<\/span><\/p>\n

    At research, we prefer lower risk UST funds, even if that means giving up few basis points of returns. In this regard, we have Birla Sun Life Floating Rate Fund Long Term Plan<\/b>,<\/a> ICICI Pru Flexible Income Plan<\/b><\/a>, UTI Treasury Advantage<\/b><\/a> and DHFL Pramerica Ultra Short Term<\/b><\/a> on our list. These funds have a relatively lower maturity, lower credit risk and reasonable risk-adjusted returns.<\/p>\n

    Do note that liquid and UST fund portfolios have a short life \u2013 in the sense that they constantly see a change, given their short maturities. To this extent, trying to chase performance can be futile.<\/p>\n

    FundsIndia\u2019s Research team has, to the best of its ability, taken into account various factors \u2013 both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts\u2019 expectations about future events. They should not, therefore, be the sole basis of investment decisions.\u00a0<\/i>To know how to read our weekly fund reviews, please\u00a0click here<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

    Many of you may be familiar with liquid funds. You may either be parking your surplus in them or using them for systematic transfer into equity funds. Another category of debt funds, called ultra-short-term funds (sometimes called liquid-plus funds) are often used interchangeably with liquid funds. However, there is quite a bit of difference between […]<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3,506,6,509,532],"tags":[515,187,209,23,148,36,432,433],"yoast_head":"\nUltra Short-term funds (UST) - What they are and when to use<\/title>\n<meta name=\"description\" content=\"Surplus money to invest? 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