Top Ultra Short Debt Funds in India

Investing in fixed-income instruments is a crucial part of a well-diversified portfolio. Among the various debt mutual fund categories, Ultra Short Debt Funds stand out as a strategic choice for investors seeking better returns than savings accounts while maintaining liquidity and low volatility. These funds have gained significant attention, especially in a volatile interest rate environment, where balancing risk and return is essential.

 

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Ultra Short Debt Funds offer a unique blend of stability, liquidity, and reasonable returns compared to other short-term investment options like fixed deposits or savings accounts. In this write-up, we will explore what Ultra Short Debt Funds are, why they are a prudent investment choice, what are their benefits, associated risks, and key considerations for investors.

 

What Are Ultra Short Debt Funds? 

 

Ultra Short Debt Funds are a category of debt mutual funds that invest in short-duration fixed-income instruments with a maturity period ranging from 3 to 6 months. As per the Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI), these funds must hold investments in instruments such as:

  • Corporate Bonds
  • Government Securities (G-Secs)
  • Commercial Papers (CPs)
  • Certificates of Deposit (CDs)
  • Treasury Bills (T-Bills)

 

Since their duration is slightly longer than Liquid Funds but shorter than Low Duration Funds, Ultra Short Debt Funds strike a balance between liquidity and return potential. As per AMFI, Ultra Short-Term Debt Funds hold a portfolio with a slightly higher tenor to earn higher coupon income.

 

Why Invest in Ultra Short Debt Funds?

 

Ultra Short Debt Funds are an ideal choice for conservative investors who want to park their money for a short duration while earning higher returns than bank deposits. Let’s examine the key benefits and industry performance.

 

1. Higher Returns Compared to Savings Accounts and FDs

Traditional savings accounts offer interest rates of 3-4%, while fixed deposits range between 5.5% and 6.5%.

In contrast, Ultra Short Debt Funds have delivered returns between 6.5% and 8% over the last year (as per AMFI data), making them an attractive alternative for short-term parking of funds.

 

2. Low Interest Rate Risk

Since Ultra Short Debt Funds invest in short-duration securities (3-6 months maturity), they are less sensitive to interest rate fluctuations compared to long-term debt funds.

This makes them a safe bet in a rising interest rate environment when longer-duration debt funds tend to underperform.

 

3. High Liquidity

Unlike fixed deposits, which have lock-in periods, Ultra Short Debt Funds offer easy redemption with minimal exit load, making them a more liquid investment option.

 

4. Ideal for Parking Surplus Cash

Investors with idle funds for 3-6 months can consider these funds instead of letting money sit in savings accounts with low interest rates.

 

5. Tax Efficiency Compared to FDs

While FD interest is taxed as per your income tax slab (up to 30%), Ultra Short Debt Funds enjoy indexation benefits if held for more than 3 years, reducing the tax burden.

 

Industry Performance and Market Trends

 

According to AMFI reports and financial news, Ultra Short Debt Funds have seen steady inflows due to their attractive risk-reward ratio. Recent industry trends include:

  • Growing investor preference for debt funds amid stock market volatility.
  • Steady returns of 6.5–8% over the last year, outperforming savings deposits.
  • Increased corporate and retail participation, especially in a scenario where interest rate movements remain unpredictable.

 

Risk and Return Profile of Ultra Short Debt Funds

 

While these funds are relatively low-risk, investors should understand potential risks before investing.

 

Risk Factors

 

Risk TypeImpact
Interest Rate RiskLow (short duration minimises impact)
Credit RiskModerate (varies based on fund portfolio)
Liquidity RiskLow (invests in highly liquid instruments)
Market FluctuationsMinimal impact (due to short maturity profile)

 

Top Ultra Short Debt Funds in India

Based on 1-year and 3-year returns, here are the top-performing Ultra Short Debt Funds:

 

Top 10 Ultra Short Debt Funds (1-Year Returns)

 

Sr. No.Fund1 Yr ReturnTERAMC
1Aditya Birla Sun Life Saving Growth Direct Plan8.02%0.34%Aditya Birla Sun Life AMC Ltd.
2Nippon India Ultra Short Duration Growth Direct Plan8.00%0.38%Nippon India Mutual Fund
3Mirae Asset Ultra Short Duration Growth Direct Plan7.92%0.21%Mirae Asset Mutual Fund
4Tata Ultra Short Term Growth Direct Plan7.87%0.30%Tata Mutual Fund
5Axis Ultra Short Duration Growth Direct Plan7.86%0.36%Axis Mutual Fund
6ICICI Prudential Ultra Short Term Growth Direct Plan7.84%0.39%ICICI Prudential Mutual Fund
7UTI Ultra Short Duration Growth Direct Plan7.82%0.33%UTI Mutual Fund
8Mahindra Manulife Ultra Short Duration Growth Direct Plan7.81%0.27%Mahindra Manulife Mutual Fund
9Invesco India Ultra Short Duration Growth Direct Plan7.78%0.24%Invesco Mutual Fund
10HDFC Ultra Short Term Growth Direct Plan7.76%0.37%HDFC Mutual Fund

Source: Kuvera 26/02/2025

 

Top 10 Ultra Short Debt Funds (3-Year Returns)

 

Sr. No.Fund3 Yr ReturnTERAMC
1Nippon India Ultra Short Duration Growth Direct Plan7.12%0.38%Nippon India Mutual Fund
2Axis Ultra Short Duration Growth Direct Plan6.97%0.36%Axis Mutual Fund
3Aditya Birla Sun Life Saving Growth Direct Plan6.93%0.34%Aditya Birla Sun Life AMC Ltd.
4ICICI Prudential Ultra Short Term Growth Direct Plan6.92%0.39%ICICI Prudential Mutual Fund
5Tata Ultra Short Term Growth Direct Plan6.90%0.30%Tata Mutual Fund
6Mirae Asset Ultra Short Duration Growth Direct Plan6.90%0.21%Mirae Asset Mutual Fund
7Sundaram Ultra Short Duration Growth Direct Plan6.87%0.23%Sundaram Mutual Fund
8Principal Ultra Short Term Growth Direct Plan6.87%0.23%Principal Mutual Fund
9Baroda BNP Paribas Ultra Short Duration Growth Direct Plan6.86%0.30%Baroda BNP Paribas Mutual Fund
10DSP Ultra Short Growth Direct Plan6.83%0.30%DSP Mutual Fund

Source: Kuvera 26/02/2025

 

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Wrapping Up

 

Ultra Short Debt Funds provide an optimal mix of stability, liquidity, and better returns than traditional savings options. They are a preferred choice for investors seeking low-risk alternatives with short investment horizons. However, investors should carefully assess credit risk, expense ratios, and market conditions before investing. With prudent selection, these funds can serve as an effective tool for capital preservation and income generation in a dynamic financial landscape. 

 

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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.

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