Don’t Miss to Add the Ultra Short Term Debt Funds to Your Portfolio
Many investors park their money in various schemes to achieve different financial goals. But, in a rush of attaining high capital growth in the long term, they often forget to secure the liquidity part, which is equally important for every individual as emergencies do not knock your door before coming. So, to be on the safe side, one must park a certain amount in a particular investment scheme which can be encashed whenever needed.
Investors park their money in liquid funds to enjoy easy cash convertibility. The ultra short term debt funds are akin to liquid funds and provide high liquidity to the investors. They are of the same kind on various lines, yet there are certain differences between these two. Ultra short-term fund provides higher returns than that of liquid funds which may be helpful in meeting your short-term financial objectives. To know whether they suit you or not, let’s understand little more about them.
Ultra short debt funds include those schemes which invest in money market instruments and debt securities with an average maturity of 6 months to 1 year. These funds do not have any lock-in period. After submitting a redemption request, you can get your money back typically in one or two business days. They usually invest in a combination of treasury bills, commercial papers, certificate of deposits, and other money instruments and debt securities. The ultra short term fund facilitates one more advantage to the investors other than high returns and short-term liquidity, that these can be transferred into equity funds by using the Systematic Transfer Plan (STP).
The short-term debt funds are also superior to savings bank accounts and fixed deposits. They provide returns on investment up to 9%, whereas savings bank accounts give interest at the rate of 3-4% pa, and fixed deposits offer 8% interest per annum. What are you waiting for? Add this fund to your portfolio which is readily providing you all scope of financial success.
Here are some points which one should consider before investing in ultra short-term debt funds:
- These funds are suitable for the investment with a period of less than one year.
- If you have any short-term financial goal to be achieved in the next one year, then this fund is highly suitable for you.
- It lets you save your money to meet the short-term emergency requirements as they offer good returns in a very short period of time.
- If no emergencies occur during the tenure, the investors have the option to withdraw the money along with the interest earned, or to systematically transfer them to equity investment for further growth.
- The ultra short-term debt funds of different AMCs vary as per the risk appetite. So, make sure to check the ratings and risk profile before investing in any of the scheme.
Ultra short term debt fund provides more returns than that of savings bank account, even after charged as tax under IT Act. Let’s understand how.
The returns earned from a debt fund (if held for less than 36 months) are taxable as per the tax slab rate provided. On the other hand, savings account interest is exempted up to Rs. 10,000 per financial year as per IT Act, 1961. Now let’s see how the returns from ultra short debt fund stand more than that of saving bank returns.
|Savings account||Ultra Short-Term Debt Fund|
|Net Taxable Income||22,000||64,000|
|*Assumed interest in savings bank as 4%p.a. & Ultra Short-Term Debt Fund as 8%. **Assumed tax slab as 20%.|
Therefore, it is clear enough in the illustration given above that how ultra short term debt funds can yield you higher returns than savings account. To avail the benefits of the schemes falling in this category you can also add this fund to your portfolio. The team of MySIPonline is always there to provide you with the best possible investment solution.
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