Ultra-Short-Term Mutual Funds – Taxation, Interest Rate

Meeting specific financial goals within a desired time frame is the basis of most investment decisions.  This article helps you understand these a sub category of debt funds known as ultra-short-term funds  in detail by knowing their function, taxation, and features. Subsequently, you can better gauge whether you must invest in ultra short term funds in India.

What are Ultra-Short-Term Funds?

According to guidelines set by the Securities and Exchange Board of India (SEBI), liquid funds can invest only in securities that mature within 91 days. This rule does not apply to an ultra-short-term fund. Investors who wish to invest for a horizon of three-to-six months can choose ultra-short-term funds.

Risks vs Returns of Ultra-Short-Duration Funds?

Understanding the Taxation of Ultra-Short-Term Funds

Investors can earn capital gains by investing in ultra-short-term mutual funds. The gains are taxable only when you redeem your investment. These capital gains are taxable based on your income tax slab irrespective of holding period if your investments are made after 1^st April 2023.

For investments made before 1^st April 2023, the capital gains are taxed based on the duration you have remained invested in the mutual fund. Short-term capital gains (STCG) are the gains earned during a holding period of three years.

Long-term capital gains (LTCG) are those earned during a holding period that extends three years. LTCG tax is 20% with the benefit of indexation, whereas STCG is added to the income earned and taxed according to the applicable income slab.

Should You Opt for an Ultra-Short-Term Fund?

An ultra-short-term fund investment might not be the best option for every investor. If you have a low risk-taking capacity and wish to enjoy high liquidity on your mutual fund investments, you must choose an ultra-short-duration fund. An ultra-short-term mutual fund offers better returns than savings accounts and fixed deposit accounts.

These funds are ideal for investors looking to park their savings in a low-risk investment for some months. Thus, anyone wanting to earn returns more than a savings account and having an investment horizon of fewer than six months should opt for an ultra-short-term fund.

Consider liquidity, risks, and returns before investing in ultra-short-term mutual funds. Ensure the fund aligns with your goals and meets your risk appetite and investment duration.