Sound financial planning is all about flexibility and active management of one’s existing and future investments. However, varying market dynamics and changing micro and macro environment can sometimes derail these plans.
In order to stay on course to achieve your financial goals, you sometimes need to be able to balance aggression with caution and discount optimism and brace up for volatility. Lower interest rates and spikes in retail inflation suggest tightening of the monetary policy. The fall in the rupee and surge in the bond yield means that a rate hike is on the cards.
Considering the current debt market scenario, investors can throw caution to the wind and re-direct some part of their valuable equity investments in relaively safer avenues where their principal will be at lower risk.
Example, consider that 9 years ago, you started investing towards buying a house after 10 years. Now, you have done all the hard work and built a corpus you plan to redeem soon. However, the current volatile market scenario threatens to eat into your investments in the next one year. Hence, the need of the hour is to be cautious and tread safely.
Ultra Short Term Bond Fund
These are low volatility ultra short term debt schemes that offer investors an opportunity to participate at the shorter end of the yield curve.
An Ultra Short Term fund invests in fixed-income instruments that have very short-term maturities. Ideally, these instruments mature in one year. While the fund manager endeavors to maintain the overall portfolio modified duration to 6-12 months, it may undergo changes in accordance with interest rate movements.
Owing to the very low durations, the rate of interest volatility has very little effect on the returns of these funds, vis-a-vis a medium or long-term bond fund.
Why Should One Consider Ultra Short Term Bond Funds?
In the current markets, an Ultra-short bond fund could be good option for investing your short-term surplus.
These funds are also an ideal vehicle for investing towards your short-term goals. As compared to liquid funds, the Ultra Short Team Bond Funds offer the fund manger the extra flexibility in constructing the portfolio without significantly altering the capital risk proposition.
Features of an Ultra Short Term Bond Fund
1. An open-ended scheme
2. Objective is to provide a high degree of liquidity
3. Underlying portfolio consists of a range of short-term debt and rated money market instruments that provide moderate yield 4. Aims to generate reasonable returns
5. Ideal for investors with short term investment horizons
Other Factors
The risk-return tradeoff for an Ultra Short Term Bond Fund would be higher than liquid funds but lower than a traditional Debt-STP scheme. In addition, here, the Principal will be at low risk. Hence, investors should consult their financial advisers about the applicability of this investment strategy vis-a-vis their financial plans and short and long-term goals.