Liquid Vs Ultra Short Term Funds: Which One To Choose?

Today, the Indian investor has a plethora of investment schemes to choose from. However, to achieve capital appreciation over the long term, one needs to be good at investment planning. Generally, investors quickly hover over top performing schemes and choose one which is a top performer among the lot. This may not be the right way to invest your hard earned money. A scheme’s past performance may or may not determine its present or future performance.

You can either choose from conservative or modern investment avenues to target your life’s long term financial goals. Financial planning helps investors determine their life’s short term and long term financial goals. Investors with a defined set of goals always find it easier to make a decent financial plan. It becomes easier to pick the right type of investments so that eventually you are able to invest wisely and come up with an established investment strategy.

If you are someone who is unhappy with their current investments and looking to shift to modern investment avenues, you can consider investing in debt mutual funds. Debt funds are those mutual fund schemes that predominantly invest in debt securities and other debt related instruments. Depending on the nature of the scheme and its investment objective a debt fund may invest in government securities, debentures, company fixed deposits, etc.

What are liquid funds?

Liquid funds are those debt funds which predominantly invest in debt and debt-related instruments. Liquid funds are open-ended debt mutual funds that invest in debt and fixed income securities that come with a maturity period of up to 91 days.

What are ultra short term funds?

An ultra-short duration fund is an open-ended slow duration investment scheme which invests in debt securities having the Macaulay duration between 3 months and 6 months.

Difference between liquid funds and ultra short term funds

Parameters Liquid funds Ultra short term funds
Maturity of securities Liquid funds invest in fixed income securities that mature over a period of 91 days Ultra short term funds invest inin debt securities having the Macaulay duration between 3 months and 6 months
Liquidity Liquid funds are highly volatile in nature Ultra short term funds do not offer liquidity as high as liquid funds
Risk Since these funds invest in securities that mature shortly, liquid funds are less risky As compared to liquid funds, ultra short term funds carry a high risk profile
Exit loads Liquid funds generally do not come with an exit load Exit load might be applicable for certain ultra short term schemes

What is better – Liquid Funds or Ultra Short Term Funds?

Whether an investor should go with liquid funds or ultra short term funds will totally depend on their investment objective and what it is that they wish to achieve with the invested amount. Liquid funds are ideal for building an emergency fund. They practically do not have exit load. Investors can redeem liquid funddepending on their income needs while the remaining amount continues to accrue interest.An ultra short term fund on the other hand is ideal for parking surplus capital for a short time period. Several investors prefer putting their money in ultra short term funds rather than keeping it the savings account. There is a far better chance of earning better interest by parking your money in ultra short schemes rather than letting it sit ideal.

Investors are expected to make a wiser decision when choosing mutual fund schemes. They can even consult a financial advisor for further guidance.

What do you think?

Written by Paul Watson

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