Best Short Term Funds - Full Guide
Ultra short term funds may be the ideal choice to you in 2025, should you wish to park your excess cash which you will be keen to earn good returns on as compared to a savings account. We give an easy and straightforward overview of the most optimal ultra short term debt funds, features, benefits, and disadvantages and provide comparison of the funds in this guide to help you choose the best investment.
What are Ultra Short Term Funds, and How do they work?
The sub-category of debt mutual funds in India is called ultra short term and they invest mainly in the fixed income instruments of Macaulay period of 3 to 6 months. These may be treasury bills, commercial papers, certificates of deposit and short maturity corporate bonds.
By holding short-residual-maturity instruments, the fund managers would like to find the balance between low risk and fair returns. This renders these funds the best bet of investors who want slightly higher returns than the bank FDs or liquid funds and would not sacrifice much on the safety or liquidity.
Why will you consider Ultra Short Term Funds in 2025?
With interest rates movement still unpredictable and inflation continuing to push upwards, investors are increasingly seeking alternative sources that will provide high returns compared to savings accounts but at a low level of volatility. The reason why ultra short term funds have become a fashionable choice is due to their:
- Even volatile markets show relatively stable returns.
- Very brief interest rate risk.
- Fast access and cash to carry out an emergency cash flow.
What Are the Important Characteristics or Salients of Ultra Short Term Funds?
The following are some of the important qualities that you ought to be aware of:
- Investment Horizon: It is appropriately suited to a time frame of between 3 to 12 months.
- Underlying assets: Money market papers and high rated debts.
- Low to Moderate Risk Profile: A little more risky than liquid funds, but much less risky than long duration funds.
- Returns: Annualised returns of 6-8 percent which is dependent on market conditions.
- Highly liquid: Redemption within working day.
- Taxation: Taxable at a rate of your income tax slab with no indexation advantage on capital gains after 2023.
Did you know?
A large number of the ultra short term funds perform better than fixed deposits in flat or increasing interest rate regimes because their duration management is more flexible.
Comparisons between Ultra Short Term Funds and Liquid Funds and Fixed Deposits
| Characteristic | Ultra Short Term Funds | Liquid Funds | Fixed Deposits |
|---|---|---|---|
| Investment Horizon | 3-12 months to 90 days | 7 days to 5 years | 7 days to 5 years |
| Redemption Time | 1 working day | Instant (up to 50k) | 1 day normally |
| Interest Rate Risk | Minorly greater | Minimum | None (fixed) |
| Returns (2025, approx) | 6.5 to 7.5 percent | 5.9 to 6.8 percent | 6 to 7.1 percent |
| Tax Treatment | Income slab | Income slab (below under 5 years) | Income slab |
| Risk | Low to Moderate | Very Low | Very Low |
| Withdrawal Penalty | None (when exit load period exceeds) | None after 7 days | Yes, otherwise, premature |
People also ask:
Q: Can ultra short term funds be relied upon to be safe in short term investment?
A: Yes, they are regarded as rather safe provided that you pick up funds that have high AAA rated securities and good credit quality track record.
What are the Advantages and Disadvantages of the Ultra Short Term Funds?
Pros
- Greater returns than savings accounts and most liquid funds.
- Unresponsive to changes in interest rates in the market.
- Flexibility of 3-12 month parking of excess funds.
- The fast redemption with low exit loads.
- Well regulated by SEBI.
Cons
- The returns will not be guaranteed, but will depend on the market.
- Slightly additional risk than liquid funds because of comparatively extended maturity.
- Not the right one when you require money in a few days.
- The efficiency of taxes becomes lower once the rules are altered after 2023.
Expert’s insight:
The 2025 version of the ultra short term funds suggests a great compromise to people who do not want to be a victim of the fluctuations of a long term debt and equity fund and at the same time earn higher returns than savings accounts often do.
What Are the Best Performing Ultra Short Term Funds in the Year 2025?
Consistency, quality of the portfolios and reputation of fund house are important although the past performance should not be the sole criteria. The following are some of the funds that have good track records and stable portfolios according to performance till June 2025:
| Fund Name (AMC) | 1Y Return % | AUM (₹ Cr) | Expense Ratio | Rating |
|---|---|---|---|---|
| Axis Ultra Short Term Fund | 7.10 | 4,950 | 0.36 | AAA/A1+ |
| ICICI Prudential Ultra Short | 7.03 | 17,500 | 0.28 | AAA/A1+ |
| HDFC Ultra Short Term Fund | 7.09 | 5,400 | 0.35 | AAA/A1+ |
| Kotak Ultra Short Term Fund | 6.95 | 3,200 | 0.30 | AAA/A1+ |
| SBI Magnum Ultra Short Fund | 7.11 | 2,710 | 0.29 | AAA/A1+ |
Returns as on May 31, 2025. Ratios of expenses and AUM are subject to change.
People also ask:
Q: Does that mean that ultra short term funds can incur negative returns?
A: Uncommon, but could happen when there is a serious credit occurrence in the underlying portfolio. In most cases these incidences are extremely rare in reputed funds.
How to Find Out the Best Ultra Short Term Fund to Your Needs?
The following are some of the considerations to be made before investing in an ultra short-term scheme:
- Credit quality of the portfolio: Use preference funds that have 90 percent or stronger in AAA or A1 rated paper.
- Consistency in past performance: Seek at least 3-5 year performance.
- Fund house reputation: Select old AMCs with experienced fund management.
- Liquidity: Go to exit loads and redemption schedules.
The other important action is to always refer to the most recent factsheet and scheme information document to determine whether the portfolio changes could affect performance.
Did you know?
This is due to the rigid rules of SEBI as of 2023 and has made ultra short term debt funds to select better quality papers minimizing the risks that were experienced in 2020 credit events.
What are the Risks of Having Ultra Short Term Funds?
Although being safer than the majority of other debt funds, there are still some risks:
- Credit Risk: When the issuer of a bond of underlying defaults, then your investment could be impacted. This risk is therefore minimized by giving preference to AAA or similar papers.
- Interest Rate Risk: The interest rate risk here is very low though that in the short run, sharp rises in the short-term interest rate can cause a temporary decrease in returns.
- Liquidity Risk: Extremely uncommon, and even ultra short term funds, in unusual market stress, can experience increased redemption pressure.
People also ask:
Q: Is it possible to use ultra short term funds such as regular savings account?
A: No, however, they are liquid, redemptions require one working day and returns are non-determined. Do not use them to pay bills but use excess cash.
Who to Invest and the Amount to Allocate in 2025?
The most appropriate funds are the ultra short term funds that are best suited.
- Investors who would like to invest money in the form of 3-12 months and hope to have higher returns than that of savings account or FD.
- The conservative investors who shall not risk their money on equity, yet will require a little higher than a depository bank rate.
- Individuals who intend to spend in the coming 6-12 months planned expenses such as tuition fees, vacation and car purchase.
You should only allocate in your total portfolio what you will require in a year. In case of longer goals, look at other alternatives.
Expert’s insight:
Systematic transfer plan (STP) can also be done on ultra short term funds, which can gradually transfer money to equity funds to plan their lifecycle.
The Most Important Things to Keep in Mind Before Investing
- Okay match the Macaulay of the fund to your real holding period, less than 3 months to avoid.
- Check the expense ratio since even 0.1 percent may affect the returns in low yield products.
- Look at any form of change in composition of portfolios.
- Always choose on the basis of stability and portfolio quality and not only on highest 1 year return.
Quick Recap (TL;DR)
- Ultra short term funds are mutual funds which invest very short maturity papers, which is best suited to a 3-12 months investment horizon.
- They pay off at an annual rate of approximately 6.9 to 7.2 percent in 2025 with a lower volatility as compared to most types of debt.
- Most appropriate when funds are excess, quick access and less risk as compared to long term debt funds and equity funds.
People Also Ask: FAQs
Q1: Is ultra short term funds superior to bank FD in 2025?
A1: Yes, ultra short term funds are more favorable and yield better returns and liquidity, however, without the capital guarantee, 3-12 months of parking.
Q2: How much would it take to invest in ultra short term fund?
A2: The minimum lumpsum investments in most of the funds are ₹500 to ₹1,000 and SIP of ₹100 per month.
Q3: Does FY 2025-26 subject its returns on taxes on these funds?
A3: Yea, according to the new regulations after 2023, the returns are taxed according to the income slab of the investor without indexation.
Q4: Could corporate/NRIs invest into ultra short term funds?
A4: Yes, they both have the chance to invest, under the precondition of KYC and other regulations of the RBI and SEBI.
Sources
- SEBI - Mutual Fund Laws.
- AMFI India - Ultra Short Duration Fund Category.
- Value Research Online - Value Categorical and Performance.
- Moneycontrol Mutual Funds.
- Mutual Funds Section in Economic Times.
