What are Short & Ultra-short Term Bond Funds?

 

What are Short & Ultra-short term Bond Funds?

Short and Ultra-short term bond funds are also known as Liquid-plus funds. And let us today understand what exactly they are and how they can generate better returns for you than the simple bank fixed deposits.

Short term bond funds are basically the type of mutual funds which primarily invest in bonds and other fixed-income instruments having a maturity tenure of only 1 year. The fund manager builds a diversified portfolio of fixed-income instruments with varying maturities. The portfolio comprises treasury bills, certificate of deposits, commercial papers, securitized debt and advances in the call money market.

Ultra-short term bond funds are the mutual funds which invest in even shorter tenure financial instruments than the short term bond funds ,mainly in money market instruments.

Right now in India, the scenario is that both the short and ultra-short term mutual funds give 9.25% and 9% annual return. Overall the returns offered by short-term financial securities are higher than fixed deposits offered by large banks for a similar tenure, which makes the fund route rather attractive.

Short term bonds versus Bank Fixed Deposits – Which is Better?

This is one of the commonest question that many readers ask me. Well, the answer is short & ultra-short term bond funds. This is because in case of Bank Deposits, you will have to break those deposits and re-do those FDs if the bank hikes the interest rates and you want to take advantage of this rising interest rates. However, this is not the problem with bond funds. The interest rates of bond funds automatically rise and fall even if you stay invested continuously. So in my opinion, it is better to invest in bond funds to take maximum advantage of rising interest rates.