Can I use ultra short duration funds instead for short-term goals?

Published: August 11, 2022 at 6:00 am

A reader asks, “You usually recommend money market funds for short-term goals. Can we also consider Ultra Short Duration Funds for this purpose?’

The definition of money market funds is simple: “Investment in Money Market instruments having maturity up to 1 year”.Ultra-short duration funds are defined as “investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months -6 months.

From “ultra short term funds”, they became “ultra-short duration funds” after the SEBI categorization rules came into force. The two phrases need not be the same! This gives Ultra short-duration funds a bit more room to be flexible than money market funds.

To understand more about the Macaulay duration, refer to:

Considering the average portfolio maturity or the modified duration (a measure of interest rate sensitivity, see above link for explanation), it will be hard to distinguish the two categories. We need to dig deeper. We shall refer to the July 2022 Debt Mutual Fund Screener for this.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Money Market Funds

  • Average maturity range  of category: 0.28 years to 0.64 years
  • Modified duration range of category: 0.27 years to 0.45 years

Ultra short duration funds

  • Average maturity range  of category: 0.26 years to 0.54 years
  • Modified duration range of category: 0.26 years to 0.45 years

So there is nothing to separate the two categories based on these two metrics.

Because of the way in which they are defined, money market funds only hold bonds up to 12 months in duration or cash or derivatives corresponding to the bonds. Ultra short-duration funds are more flexible. Here are some examples:

  • Aditya Birla SL Savings Fund holds 13.45% of bonds maturing between 1-3 years.
  • Axis Ultra Short Term Fund holds 6.16% of bonds maturing between 1-3 years;   0.29% of bonds maturing between 3 to 5 years, and  0.28% of bonds maturing above 5 years.

This freedom stems from the category definition. Money market funds are defined in terms of tenure, while ultra-short duration funds are defined in terms of “duration” A bond fund manager can hold significant amounts of long term debt (> 1 year) and yet keep the Macaulay duration of the portfolio between 3 months -6 months.

This means ultra-short duration funds can be more volatile than money market funds with sharper up or downturns. It is hard to find style purity in terms of bond duration in this category. A new investor is better off with the money market category.

The second issue concerns the credit rating profile. All money market funds hold either cash or A1-rated bonds. This is the highest short-term rating corresponding to AAA of long-term bonds. The rating can vary from A1+ to A1 to A1- although A1+ is the most common.

Ultra short duration funds are more adventurous. The following funds hold 10% to 20% of AA/AA+/AA- rated bonds as of July 2022.

  • Kotak Savings Fund(G)
  • Invesco India Ultra Short Term Fund(G)
  • Aditya Birla SL Savings Fund-Reg(G)
  • Axis Ultra Short Term Fund-Reg(G)
  • UTI Ultra Short Term Fund-Reg(G)
  • ICICI Pru Ultra Short Term Fund Fund(G) – also holds 1% of A / A+ / A- bonds.
  • Nippon India Ultra Short Duration Fund(G)

So the chance of credit rating change or even default is higher in the ultra-short duration category.

Today it is easy to find an ultra-short duration fund that does not invest in low-rated bonds. However, it may not remain so in future.

Unlike money market funds, ultra-short duration funds lack style purity in duration and credit rating across the category. So we recommend new investors stay away from the ultra-short category. The possibility of a higher return is not worth the additional risk. A money market fund is a simpler, cleaner choice.

That said, adventurous investors can consider ultra-short duration funds However, we recommend using them for more than three-year goals. Do keep an eye on the credit rating profile of the portfolio from the fund fact sheets. Do not get misled by the “average credit rating” shown in fund rating portals.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)