Here are top 6 ultra short-term funds you can check out for investments

With increasing inflation, young investors are drifting to ultra-short-term funds, which are fixed-income debt fund schemes. These investments not only keep you secure from the long-term damage of inflation but also earn good dividends. Typically, the investment horizon for these ultra-short-term funds ranges from a week to about 18 months. The risks involved are low with the promising dividends, and least market effects. These funds are invested in fixed-income assets, which means they can be suitable for investors who have a low-risk tolerance.

These funds are immune to interest rate risks, given the short maturity and underlying assets. The high returns are much more than the liquid assets, and the management of ultra-short funds, just like any other mutual fund, category has an expense ratio. Therefore, considering the overall returns generated through the funds when compared to liquid funds, a long period of holding and lower expense ratio would help to recover the funds gone out in the form of interest rate fluctuations.

Resulting in lucrative dividends, and an average return of 5.28 per cent, while investments can be made for short durations, the Macaulay Duration is three to six months. The yield curve is usually rising. As for the tax, if your investing holding period is less than 36 months, then the capital gains arising from the sale of units of ultra-short duration funds will be added to your income and taxed according to your income tax slab rate.

Like any other investment made in this fluctuating market, while the risks involved are low, it's not zero. Some of your returns can be chipped out in the way of taxes. Any gains from these funds are subjected to capital gains taxes in India. If the period (time gap between purchase and redemption) of gains is up to three years, the investor will be liable to pay short-term capital gain tax (STCG). Any period of more than three years will attract long-term capital gain tax (LTCG). STCG is taxed as per the individual’s slab rates, and LTCG is taxed at 20 per cent (after indexation).