What are Ultra short-term debt funds?

​​​​Ultra short-term funds – a better avenue to meet near-term needs

Demonetisation has brought forth the idle cash held by Indian households, resulting in a lot of inflow into the mainstream financial (banking) system - Rs 14.971lakh crore until December 10, 2016 according to RBI. While a portion of this money is expected to be withdrawn over the medium-to-long term by investors, some of this money would remain in the financial system, and this is where the opportunity for investors lies. Rather than looking at traditional investment avenues, such as savings bank accounts and bank fixed deposits (FDs),investors can look at debt mutual funds for investment options.

In this article, we will look at how Ultra short-term debt funds can help Investors park a portion of their idle money for an investment horizon of 6 months to one year.

What are Ultra short-term debt funds?

These are money-market funds that invest in certificates of deposits (CDs), treasury bills, commercial paper (CPs) and corporate bonds, with an average maturity ranging 6 months to one year in most cases. Further, redemptions in these funds are processed within few days .

Table 1: Ultra Short Term funds versus Fixed Deposits

Ultra short-term funds Banks FDs
Returns are market-linked and the principal amount is not guaranteed Guaranteed returns and principal amount


Short-term capital gains - For a period of less than three years, as per the individual's tax bracket of 10%, 20% and 30%

Long-term capital gains tax- For the period of greater than three years, it is 20%^ with indexation

Dividend distribution tax of 28.84%


Interest income taxed as per the income-tax bracket.

Easy liquidity, but exit loads are applicable

Penalty for premature withdrawal

Tax deduction at source (TDS) is not applicable TDS if the interest income exceeds Rs 10,000 in a financial year

^ Surcharge at 15% to be levied in case of individual/ HUF unit holders where their income exceeds Rs 1 crore.

Note – The comparison of Ultra short-term funds and Banks FDs are given for general information purpose only.


Ultra short-term debt funds, represented by the CRISIL–AMFI Ultra Short FundPerformance Index, have given an absolute return of around 9%.

Table 2: Point to Point returns of ultra short-term funds

Indices 6 months 9 months 1 years
AMFI Ultra Short Fund Performance Index ^4.15%6.51%8.99%

^ Represented by CRISIL – AMFI Ultra Short Fund Performance Index,

Source: CRISIL Research, Data until January 31, 2017.

Portfolio analysis

While these funds are market–linked, our analysis of CRISIL-ranked ultra short-term debt funds in December 2016 shows that these funds have maintained superior credit quality over the past one year (see chart 1). Further, true to their mandates, these funds have invested around 48% on average in short-maturity instruments, such as CDs and CPs during the period. On credit quality, these funds have 79% exposure to top-rated (AAA/A1+) paper, government securities and cash equivalents.

Chart 1: Credit-quality distribution


Others include reverse repos, interest-rate futures (IRFs), collateralised borrowing and lending obligations (CBLOs), net receivables, FDs, MF units and call money

Portfolio data of the past one year to December 2016 is considered for analysis

Source: CRISIL Research

Note that these funds, unlike traditional investments, do not provide any assurance of a fixed return and are subject to risks, such as credit risk, interest-rate risk, mark-to-market and market risks. Investors can allocate a portion of their portfolio to these funds and capitalise on tax efficiency, liquidity and the ability to get a reasonable return. The investor should also assess a fund's portfolio, investment objectives and risk profile before investing.

Disclaimer :

Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.

Mutual Fund investments are subject to market risks, read all scheme related document carefully.​

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