Mutual funds have a lot to offer to different types of investors. You can invest in them on the basis of a number of factors, such as your risk appetite, investment horizon, goal, and more. Debt funds are generally considered suitable for investors with a low risk appetite. Among debt funds, there are further categorizations, such as short-duration funds and ultra-short duration funds. Read on to know what these are and how they differ from one another.
Difference between short duration and ultra-short duration mutual funds:
Here are some points of difference between the two:
| Points of difference | Short duration mutual funds | Ultra-short duration mutual funds |
| Where do they invest? | Short duration mutual funds invest in debt instruments or money market securities with an investment term ranging between 1 year and 3 years. | Ultra-short duration mutual funds invest in debt instruments or money market securities with an investment term ranging between 91 days and 365 days. |
| How much risk do they carry? | Short duration mutual funds carry higher credit risk in comparison due to the longer maturity term. | Ultra-short duration mutual funds carry lower credit risk compared to short-term funds because of the shorter maturity term. |
| What returns can you expect? | Short duration mutual funds can yield relatively higher returns. In a one-year period, these may offer returns between 5.6% and 10.66%. | Ultra-short duration mutual funds may yield comparatively lower returns. In a one-year period, these may offer returns between 3.67% and 7.12%. |
| Who can invest in them? | Short duration mutual funds are suitable for investors with a medium to a long-term portfolio. | Ultra-short duration mutual funds are suitable for investors with a short to a medium-term portfolio. |
Short and ultra-short-term mutual funds also have many similarities. Firstly they are both debt funds, so the returns may be more stable than equity funds. Secondly, since the maturity term is less than 3 years in most cases, they are both taxed as short-term capital gains.
However, if you hold the funds for longer than 3 years, you would have to pay long-term capital gains taxes of 10% without indexation benefit and 20% after indexation benefit. The two types of funds are also highly flexible and offer easy withdrawal options. In fact, these may be used as a substitute for a savings bank account. Moreover, the expense ratio for these debt funds is also generally lower than equity funds.
To sum it up
The decision to invest in short and ultra-short-term mutual funds ultimately depends on your goals and investment horizon. So, choose an option only after carefully considering all your requirements and investment purposes. You can also consider investing in both types of funds for better diversification. Regardless of what you select, you can use the Tata Capital Moneyfy App to invest in different debt mutual funds and simplify your investments by a great margin.
