Short Duration vs Ultra-Short Duration Funds: Which Horizon Fits You?

Short duration funds invest in a mix of fixed-income instruments and have a Macaulay duration between one to three years as per SEBI regulations. These funds aim to maintain a balance between stability and moderate interest-rate sensitivity.

They typically invest in:

• Corporate bonds

• Government securities

• Money market instruments

• Certificates of deposit and commercial papers

Because their maturity period is relatively short, these funds tend to have moderate risk exposure compared to long-duration debt funds.

Here a few key features of short duration funds:

1. Maturity Profile and Rate Sensitivity

   Short duration funds have a Macaulay duration between one to three years. Because their securities mature over a slightly longer horizon, they tend to be more sensitive to changes in interest rates than ultra-short duration funds, but less volatile than long-duration funds.
    

2. Moderate Risk 

   These short duration mutual funds generally invest in high-quality debt instruments such as government securities, corporate bonds, and certificates of deposit. While they carry moderate interest rate and credit risk, they may be less riskier than long-duration funds.
    

3. Liquidity

   These short-term funds provide reasonable liquidity to investors. You can buy and sell them with relative ease if you need immediate liquidity.
    

4. Tax Treatment

   If the short duration fund is purchased on or after 1st April 2023, capital gains from the fund will be taxed at your applicable income-tax slab rate under current rules.

    

Ultra-short duration funds are a type of debt mutual funds with a Macaulay duration of three to six months. They aim to focus on maintaining high liquidity and minimal interest-rate exposure through very short-term investments.

They generally invest in:

• Treasury bills (T-bills)

• Certificates of deposit (CDs)

• Corporate bonds that have short-term maturity

• Commercial papers (CPs)

These ultra-short duration mutual funds are often used for short-term allocation or to manage temporary surplus funds within a diversified portfolio.

The key features of ultra-short duration mutual funds are outlined below:

1. Short Maturity Period

   These funds have a Macaulay duration of three to six months, so their holdings mature quickly. Since interest rates usually change gradually, this short horizon limits price impact, making ultra short term mutual funds less sensitive to rate movements than long-duration funds.
    

2. Liquidity

   Ultra short term funds generally allow quick redemptions, making them useful for short-term allocation or temporary parking of surplus funds.
    

3. Low to Moderate Risk

   They invest in high-quality, short-term debt instruments such as treasury bills, certificates of deposit, and commercial papers. While not completely risk-free, their shorter tenure makes credit and interest-rate risks relatively lower than long duration funds.
    

4. Tax Treatment

   Being part of the debt mutual fund category, the taxation of ultra short term funds depends on when you invest:

   • Scenario 1: Invested on or before March 31, 2023, and sold after July 23, 2024:

     • If held for less than 2 years, the long-term capital gains are taxed at the applicable income tax slab rate.

     • If held for more than 2 years, the long-term capital gains are taxed at 12.5% without indexation.
        

   • Scenario 2: Invested on or after April 1, 2023:

     • Taxed as per your income tax slab rate, regardless of the holding period.

        

Now that you know what are short duration and ultra-short-term mutual funds, differences between the two must be easy to notice. The following table sums up these differences between short duration funds and ultra-short-term debt funds once again:

Both categories fall under the broader umbrella of debt funds, but their suitability depends on how long you plan to stay invested and your comfort with risk.

Choosing the right fund depends on your investment timeline and liquidity needs. Here’s how you may decide:

1. Ultra-Short Duration Funds: For Short Horizons

   If you want to invest for a few months — say, between three to six months — and need quick access to your funds, ultra-short duration mutual funds may fit you better. They are designed for stability, offering limited price movement even when interest rates fluctuate.

   They work well if you’re:

   • Parking emergency or idle funds temporarily

   • Setting aside future expense such as insurance premium, vacation, or minor home repair

   • Looking for an alternative to savings accounts with comparatively better returns potential

      

2. Short Duration Funds: For Medium-Term Goals

   If your goal is around one to three years away, short duration funds can be a more suitable option. They invest in slightly longer-term securities and may offer higher yield potential compared to ultra-short funds.

   They fit well if you’re:

   • Saving for a near-term financial goal such as car purchase or children’s education expenses

   • Looking for a short term investment in mutual fund with potentially moderate returns

   • Comfortable with limited fluctuations in value

The basic principle is simple: match your fund’s duration with your investment horizon.

When selecting between short duration and ultra short term mutual funds, consider these key factors:

• Portfolio Quality: Check if the fund invests in high-rated debt instruments.

• Average Maturity: Ultra-short funds should stay within 3–6 months, while short duration funds range between 1–3 years.

• Expense Ratio: A lower expense ratio helps improve overall fund performance.

• Exit Load: Verify if any charges applies for early redemption.

• Fund House Track Record: Prefer AMCs with a strong risk management approach and transparent disclosures.

Before investing, review all scheme information documents carefully, as these funds still carry market and interest rate risks despite being lower on the risk spectrum.

Both short duration funds and ultra short duration funds serve distinct purposes within a portfolio. Ultra-short duration funds may suit investors seeking liquidity and relative stability over a few months, while short duration funds are better aligned with goals spanning one to three years.

Understanding the differences in low duration funds, their risk, and investment horizon can help you choose an option that matches your financial objectives. Used thoughtfully, these short duration mutual funds can support efficient money management while potentially maintaining a balance between safety and steady growth.

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