How are liquid funds different from ultra-short-term funds?

Liquid funds invest in securities with a maturity of up to 91 days. Assets invested are not bound for a long time as liquid funds do not have a lock-in period. It is almost similar to having cash in hand or a savings account.

Mar 18, 2018 11:03 IST India Infoline News Service

Liquid funds and ultra-short-term funds are types of debt mutual funds which invest in short-term market instruments such as government securities, commercial papers, treasury bills, as well as corporate bonds.
 
Liquid funds
Liquid funds invest in securities with a maturity of up to 91 days. Assets invested are not bound for a long time as liquid funds do not have a lock-in period. It is almost similar to having cash in hand or a savings account.
Liquid funds invest in a security that has a market price, but its NAV does not fluctuate as it does in other funds. According to SEBI, when the security matures in under 60 days, it need not be mark-to-market.
Basically, in liquid funds, the interest earned from your debt funds will be divided into the number of days it holds the security. The security price remains steady. So liquid funds account for linear growth, which can be seen as a steady line going up.
 
However, it does not mean that liquid funds are risk-free. These funds also invest into scrips which mature between 60 to 91 days and, according to SEBI, it needs to mark-to-market the same. If the underlying company defaults, the market price of a scrip can go down. To reduce the risk, these funds mostly invest in scrips that mature in 15 to 20 days.
 
Liquid funds disburse money in a period of one day. With innovations in technology, this will soon decrease to a few minutes.


 
Ultra-short-term fund
 
Ultra-short-term (UST) fund invests in securities that mature within seven days to about 540 days (18 months). It is one of the best options for investors who want to invest their money over a period of one to nine months. SEBI has classified UST funds as instruments that need to mark-to-market. The price of these securities may change on a day-to-day basis. Hence, UST funds are more fickle than liquid funds, especially in a term of up to 90 days. However, it invests in a mix of debt and equity, so it is less volatile than pure equity schemes. These funds can be different from one another as there isn't any regulatory definition of UST funds.
 
UST funds can also be used for Systematic Transfer Plans (STP) instead of liquid funds. You can instruct the same fund house to switch a regular sum every month from UST to equity. This way, you can take advantage of UST and earn more.
 
Comparison
 

Liquid fund

Ultra short-term fund

Average maturity

Debt instrument with maturity up to 91 days

Longer term debt instrument with maturity over seven days to 540 days (18 months)

Minimum holding period

Ideally two weeks

Three months

Risk

Low

High, in comparison to liquid funds

Expense

Does not charge exit load

Some funds may charge exit load for an initial period of investment

Advantages

Better regarding liquidity. Moreover, it provides higher returns than saving bank account

Initially, gives better returns than liquid funds


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