Ultra Short Duration Funds: Features, Advantages, & Taxation

Ultra Short Duration Funds are debt funds with 3 to 6 months of investment horizon. 

These funds are suitable if you have an expense planned within 3 to 6 months. For example, a down payment for a car or a house.

Ultra Short Duration Funds are comparatively safer than medium to long-duration debt funds and deliver decent returns. 

Read along to know where these funds stand on the spectrum of all debt funds.

How Do Ultra Short Duration Funds Work?

Ultra Short Duration Funds primarily distribute your assets among debt and money market securities, keeping the Macaulay Duration of the scheme between 3 to 6 months.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a maturity period of slightly more than liquid funds and lesser than short-duration funds. 

These funds are perfect to park your money for a few months.

Top 4 Advantages of Ultra Short Duration Funds

1. Liquidity

Ultra Short duration funds offer better liquidity compared to medium to long-duration debt funds. 

You can keep your money in these funds for 3 to 6 months (or more if you’d prefer) instead of a bank account. These funds can deliver superior returns compared to savings accounts and FDs. 

2. Lower Risk

As these funds mature within months, the interest rate risk is comparatively lower. And as for credit risk, almost all the funds in a similar category prefer to maintain high-credit quality.  

You can always check the credit ratings and performance of the funds before investing. 

Note: The interest rate risk, if at all, is a temporary effect on the fund’s performance. Ultra Short Duration Funds can be your go-to investment during a rising interest rate scenario as their underlying assets mature quickly and capture the new interest rate.

3. Shorter Investment Horizon

Ideally, your portfolio should be a blend of short and long-term investments. You must be planning for both long and short-term financial goals.

Equity mutual funds and long-duration debt funds can take care of your long-term goals based on your risk appetite. Ultra Short and Short Duration funds are better suited to achieve a quick financial goal. 

If you are looking for a comparatively shorter investment horizon, these funds are the right fit for you. 

4. Suitable to Start The Systematic Transfer Plan(STP)

Similar to liquid funds, Ultra Short Duration funds can also be the source funds for the STP. 

STP is a SIP alternative. Instead of transferring money from a bank account to mutual funds, you transfer it from one mutual fund to another fund(s). You can invest a lumpsum amount and start STP into equity funds. 

Read more about Systematic Transfer Plan. 

Things to Consider Before Investing in Ultra Short Duration Funds

1. Investment Horizon

These funds are suitable for investors looking to park their money for 3-6 months. These funds can sometimes be slightly more volatile than liquid funds. Holding them for at least 3 months will lower the risk and generate better returns.

2. Risk and Returns

Interest rates impact each debt fund in a different way, primarily based on the investment tenure. Ultra Short Duration funds are less risky than short to medium-duration funds but riskier than liquid funds.

Fund managers may introduce underlying assets with lower credit quality but the potential to deliver superior returns. In such a case, your portfolio may come across credit risk. 

Don’t forget to check the fund’s past performance, rolling returns, and overall ratings before investing. 

3. Financial Goals and Current Portfolio

Investors should evaluate their portfolios before investing in any mutual funds. Though these funds are Short Duration, you may want to check if they align with your goals. The risk and returns in debt funds are different compared to equity funds. 

Ultra Short Duration funds can be a good addition to your portfolio to balance the risk without a long lock-in period.

These funds are suitable for any of your short-term goals. Be it buying a card in the next few months or planning a wedding. You can invest a lumpsum amount and earn returns. 

Taxation on Ultra Short Duration Funds

As per the tax rule applicable from 1st April 2023, the debt funds will not enjoy 20% tax with indexation. 

Now, both long-term and short-term gains will be taxed as per your income tax slab. 

Who Should Invest in Ultra Short Duration Funds?

Ultra Short Duration funds are for investors planning to invest for a few months. 

If you have a lumpsum amount to invest, equity funds may not be safe. And FDs, well… you may not earn superior returns.

Instead, invest your lump sum amount in these funds. You enjoy the benefit of high liquidity, safety, and better returns. Additionally, you can start STP to gradually distribute your investment among other mutual funds. 


Debt funds come into the picture when you want to earn returns without risking your money with market volatility. Instead of keeping the money idle in your bank account, transfer it into Ultra Short Duration funds.

The returns on these funds will contribute to the expense you have planned within 3-6 months. For example, a car or home down payment, or a vacation abroad. 

Debt funds are suitable for anyone, especially to balance the risk and returns. However, we’d recommend talking to a financial advisor to see which debt funds are suitable for your goals.

Advisors at VNN Wealth have a decade worth of experience in debt funds. Get in touch to plan your next investment.