Difference between Liquid Fund, Ultra Short Term Fund and Short Term Debt Fund

  • 23 February 2017 | 1209 Views | By Mint2Save
Difference between Liquid Fund, Ultra Short Term Fund and Short Term Debt Fund

We have entered into an era, where savings accounts/fixed deposits were the sole safe money keeping options. With the advent of mobile access to investments, the era of safer investment avenues such as liquid and short term mutual funds has arrived.

But a lot of investors are unable to bring a clear demarcation between liquid, ultra short and short term funds.

  • Liquid funds invest in securities with residual maturity of up to 90 days; ultra ST funds can invest in securities with maturity higher than 90 days.
  • Liquid funds are generally considered less risky as compared with ultra ST funds on account of the fund duration being lower.
  • Liquid funds are subject to a dividend distribution tax of 25% (effective rate after surcharge and cess is 27.04%). For ultra ST funds, the tax is 12.5% for individual investors (effective rate 13.52%).
  • The short-term capital gains tax (for growth units) in case of both is as per your income-tax bracket; long-term capital gains tax is at 20% with indexation.
  • Liquid funds usually don’t have an exit load. Ultra ST funds charge exit load in the range of 0.1-1% if funds are redeemed before a specified time period
  • Average pre-tax annualized return of ultra ST funds is around 9.5% and for liquid funds 8.25%.

TABLES ARE AS MENTIONED BELOW

Table-1

FUNDS MATURITY DIVIDEND TAX
LIQUID UPTO 91 DAYS 25/30%
ULTRA SHORT TERM INCLUDING  91+ DAYS 15%

Table-2

  LIQUID FUND ULTRA-SHORT TERM SHORT-TERM
DEFINITION LIQUID MEANS EASY TO CONVERT TO CASH AT ITS CURRENT VALUE. INVESTS IN VERY SHORT TERM PAPER. EARLIER KNOWN AS LIQUID PLUS FUNDS, THEY INVEST IN VERY SHORT TERM DEBT SECURITIES WITH A SMALL PORTION IN LONGER TERM DEBT SECURITIES. MOST ULTRA SHORT TERM FUNDS DO NOT INVEST IN SECURITIES WITH A RESIDUAL MATURITY OF MORE THAN 1 YEAR. ALSO REFERRED TO AS CASH OR TREASURY MANAGEMENT FUNDS, ULTRA SHORT TERM FUNDS ARE PREFERRED BY INVESTORS WHO ARE WILLING TO MARGINALLY INCREASE THEIR RISK WITH AN AIM TO EARN COMMENSURATE RETURNS. SHORT TERM DEBT FUNDS TYPICALLY INVESTS IN:

 

·              T-BILLS, GOVERNMENT

SECURITIES

·              CERTIFICATE OF DEPOSITS, COMMERCIAL PAPERS

·              CORPORATE BONDS AND SECURITISED DEBT

MATURITY PERIOD ONLY UPTO 91 DAYS OF MATURITY INCLUDING 91 + DAYS AVERAGE MATURITY OF THE PORTFOLIO IS FROM 1 TO 3 YEARS.
RISK FACTOR VERY LOW PROTECT INTEREST

RATE RISK

EXPOSED TO INTEREST RATE RISKS
  NOT IMMUNE TO

MARKET FLUCTUATION

ADVANTAGE
WHO CAN? INVESTOR WHO REALLY INTERESTED IN LOWEST MATURITY. THE PERIOD OF INVESTMENT IN THESE FUNDS COULD BE AS SHORT AS A DAY. INVESTORS WHO HAVE SHORT TERM SURPLUS FOR A TIME PERIOD OF APPROXIMATELY 1 TO 9 MONTHS SHOULD CONSIDER THESE FUNDS. THESE FUNDS ARE SUITABLE FOR CONSERVATIVE INVESTORS WHO HAVE LOW TO MODERATE RISK TAKING APPETITE AND AN INVESTMENT HORIZON OF 9 TO 12 MONTHS.
NOTE BY RULE, THEY CANNOT INVEST IN INSTRUMENTS WHOSE MATURITIES ARE MORE THAN 91 DAYS. LIQUID FUNDS ALSO STICK TO INSTRUMENTS OF THE HIGHEST CREDIT QUALITY. THEY DELIVER HIGHER RETURNS THAN LIQUID FUNDS. GO FOR LONGER MATURITIES THAN ULTRA SHORT-TERM FUNDS. THE AVERAGE MATURITY PERIODS OF THESE FUNDS’ PORTFOLIOS WILL TYPICALLY BE AROUND 2 YEARS OR A MAXIMUM OF 3 YEARS. THEY REQUIRE A HOLDING PERIOD OF AROUND 2 YEARS.

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