Ultra Short-Term Debt Fund- Better than keeping money in a Savings bank Account!
Ultra short-term debt funds are mutual funds which invest in liquid instruments. They are also known as liquid plus funds. As the name suggests these are investments made for a very short period say on overnight basis, 10 days, 1 month, 6 months or more. These funds are flexible when it comes to investment period. These funds invest in money market instruments such as Certificate of Deposits (CDs), Commercial Paper, Treasury- bills & other similar instruments.
Ultra short-term debt funds are the best place to keep your money when one has excess funds for a short period. This period can be the waiting period for making any down payment for house or car, or to buy some asset after a month or so. By investing in these funds one can earn a better return than on a Savings bank account. It is the best place to park your funds for a short time. We at Fpguru.com will show you why-
Higher Returns
Compared to savings a/c where the returns are 4% p.a. Ultra short-term debt funds give higher returns of around 5-7%. Ultra short-term debt funds have given approx returns of 3-4% in last 6 months. These funds have always delivered better returns than savings account.
Tax Advantage
Withdrawal from these funds attracts short-term capital gain tax. However if you opt for a Dividend Reinvestment plan of Ultra short-term debt funds you will not need to worry about this. The dividend income of mutual funds is tax-free in the hands of investor. These funds however pay a Dividend Distribution Tax (DDT) of 13.84% which is less compared to 30.99% tax paid on Short Term Capital Gain or interest earned on bank savings. This makes a lot of difference in the post-tax returns. Companies or individuals often park their excess funds in Ultra short-term debt funds to get tax advantage.
Easy Liquidity
Investors can make a minimum investment of Rs. 1,000/-. Investors can liquidate at a lucrative NAV compared to savings bank or bank fixed deposits where it may not be allowed. These funds redeem on T+1 basis. This means the redemption cheque is dispatched the very next day of the redemption request made. This means instant liquidity. These funds may also have facilities like ATM access and third party cheque against the fund.
Low Risk
Investments in any kind of funds are subject to market risk and these funds are no exception. However Ultra short-term debt funds have a low risk due to its exposure to debt of low maturity period. That means that the debt instrument invested in has a maturity period of 90 days to 365 days thus making it less sensitive to the changes in the market interest rates than a long term bond. These funds invest in very short term investments making the risk almost negligible.
Low Expense
These funds have no entry and exit loads in most cases. Since funds are invested for short time in lower interest yielding debt instruments, the expense ratio of the funds should be low. Lower the expense more money is left for the investor. The investor has an option of withdrawing whenever they want without paying any extra cost.
So do keep your contingency funds or short term excess funds in such schemes. If your financial goals will come up within a year, then too you should park money here.They offer better returns than a bank account with low risk & high liquidity. It is a smarter way to keep short term funds.
By Namrata Shah.
The writer is working with FpGuru.com as a para-planner.
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Comments
and coverage! Keep up the wonderful works guys I've added you guys to my blogroll.
thanx
thank u
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