Liquid Funds Vs Ultra Short Fund: Which One Should You Choose?

Looking for alternatives to park your short-term money beyond savings accounts and short-term bank FDs? If you haven’t explored Liquid funds and Ultra-short duration funds yet, you’re missing out on some excellent opportunities.

This blog post explores the universe of these two investment vehicles, outlining their unique characteristics, returns to assist you in selecting the best option for your financial needs.

Debt Mutual Funds – Overview

A debt fund is a mutual fund that invests primarily in fixed-income securities such as corporate bonds, government bonds, treasury bills, etc. The debt funds generate gains via interest income from underlying debt securities and appreciation of the same in the secondary market.

Generally speaking, they are less risky and volatile than equity funds since the fixed-income instruments in their portfolio provide predictable returns and less volatility.

Nonetheless, interest rate volatility, liquidity risk, and the credit risk of the underlying bonds are usually the risks connected with debt funds. As per the SEBI, based on the securities’ maturity length, mutual funds in the debt category comprise 16 subcategories.

If you want to explore all of them, check out our blog on Debt categorization of mutual funds:

Ultra-short Fund

It is a type of that invests in debt instruments with maturities ranging from three to six months, such as money market instruments or fixed-income securities.

The fund has minimal risk and a lot of liquidity. Securities of ultra-short funds have low volatility because of their short maturity. Investors wishing to invest in the debt category of mutual funds for a six-month term might choose ultrashort funds.

Features of Ultra-short duration fund

1. The portfolio of these funds consist of securities having maturity up to 6 months.
2. As compared to longer-duration funds, the ultra-short fund carries a low-interest rate sensitivity.
3. The fund generally provides low returns as compared to debt funds with higher maturity, but the risk involved in this fund is also on the lower side. Further, returns of ultra-short funds generally hover around returns of fixed deposits of scheduled commercial banks.
4. Due to the short duration of the portfolio, the fund aims to maintain a high level of liquidity, which makes it easy for investors to enter and exit this fund without any exit load.

Performance of Ultra-short Funds

Let’s have a look at the performance of some of the top ultra-short funds (annualized return):

Scheme Name	6 Months (%)	1 Year (%)	3 Years (%)
Mirae Asset Ultra Short Duration Reg Growth	3.8	7.38	5.57
ICICI Pru Ultra Short-Term Growth	3.78	7.24	5.56
Bandhan Ultra Short-Term Reg Growth	3.73	7.21	5.39
HDFC Ultra Short-Term Growth	3.72	7.18	5.44
SBI Magnum Ultra Short Duration Reg Growth	3.71	7.21	5.39
Mahindra Manulife Ultra Short Duration Fund Reg Growth	3.63	7.07	5.31
Tata Ultra Short Term Reg Growth	3.48	6.7	5.01
DSP Ultra Short Fund Reg Growth	3.47	6.87	5

Liquid Fund

A “liquid fund” is an open-ended debt mutual fund that invests in debt instruments having maturities of less than 91 days. The portfolio consists of high-credit-grade fixed-income securities.

Liquid funds are regarded as the lowest-risk debt mutual funds. They offer a slightly higher return than a savings bank account.

Features of Liquid Fund

1. Investors can earn a bit more than a savings account by parking their excess funds in a liquid fund.
2. It is the only fund whose NAV is calculated daily, whether it is Saturday or Sunday.
3. Although liquid funds post higher returns than savings bank accounts, their returns can fluctuate depending on market and economic conditions.
4. Liquid funds prioritize safety and liquidity, so their returns are lower as compared to other debt funds.

Performance of Liquid Funds

Let’s have a look at the performance of some of the top liquid funds (annualized return):

Scheme Name	6 Months (%)	1 Year (%)	3 Years (%)
HDFC Liquid Growth	3.72	7.24	5.46
ICICI Pru Liquid Growth	3.73	7.26	5.46
Nippon India Liquid Growth	3.71	7.24	5.46
ABSL Liquid Growth	3.72	7.27	5.51
Edelweiss Liquid Ret Growth	3.68	7.17	5.37
Kotak Liquid Reg Growth	3.69	7.22	5.44
Baroda BNP Paribas Liquid Plan Growth	3.68	7.24	5.52
White Oak Capital Liquid Reg Growth	3.65	7.13	5.21

Liquid Vs Ultra-short Funds

Particulars	Ultra-short Fund	Liquid Fund
Average Maturity	It invests in debt securities with a maturity from 3 to 6 months.	It invests in debt securities that have a maturity of up to 91 days.
Returns	It provides slightly higher returns than the liquid fund.	The returns of liquid funds are on the lower side as compared to ultra-short duration funds.
Liquidity	These are less liquid than Liquid funds.	The liquid funds provide higher liquidity than the ultra-short duration funds.
Exit Load	It generally has a nil exit load.	Liquid funds have an exit load of up to 7 days.
Risk	It carries a slightly higher risk than liquid funds.	It carries the lowest risk.
Cut off timings	The cut-off timing for purchasing liquid funds is 1:30 p.m., while the time for redemption is 3 p.m.	The cut-off time for purchase and redemption of liquid funds is 3 p.m.

Conclusion

In summation, while ultrashort funds carry a more significant risk than liquid funds, they also offer marginally higher returns. Liquid funds offer high liquidity and safety and are attractive to investors who are looking for alternatives to the savings accounts. Investors with short to intermediate investment horizons and moderate risk tolerance may find ultra-short-term funds appealing.

However, before investing in debt funds, you must weigh all the risks involved and consult with your financial advisor.

Frequently Asked Questions (FAQs)