Axis Ultra Short Term Fund: A good scheme for parking your idle funds

What are ultra-short duration funds?

Ultra-short duration funds are debt mutual fund schemes which invest in debt and money market instruments such that their Macaulay Duration is between 3 to 6 months. Ultra short duration funds usually invest in commercial papers (CPs), certificates of deposits (CDs), Treasury Bills, overnight securities (TREPs) etc. The interest risk of these funds is fairly low.

To know more about ultra short term funds do read should you invest in ultra short term funds

Why and who should invest in ultra short duration funds?

• Investors often keep fairly large sums lying idle in their savings bank accounts for long periods of time. If you keep large sums in your savings bank account, then you are making the most unproductive use of these funds because savings bank interest rate is very low.


• You can put your idle funds to productive use by investing them in ultra short duration funds.


• Ultra short duration schemes are suitable for parking your funds for investment tenures of 3 months to 1 year.


• Yields of ultra short duration funds are usually higher than your savings bank interest.


• Since the interest rate risk of ultra short duration funds are fairly low, they can be good investment options for investors with low to moderately low risk.


• Ultra short duration funds are very liquid and can be used for short investment tenures. However, minimum 3 month tenures are recommended for these funds


• Ultra short duration funds can be good short term investment options inrising interest rate environment.


• Ultra short duration funds can also be used as source funds for Systematic Transfer Plans (STPs) to equity funds in volatile markets.

In this article, we will review Axis Ultra Short Term Fund.

Axis Ultra Short Term Fund

Axis Ultra Short Term Fund was launched about 4 years back and has around Rs 5,704 Crores of assets under management. The expense ratio of the scheme is just 1.18%. The scheme has given 5.24% returns since inception (see the chart below).

Source: Advisorkhoj Research (as on 25^th August 2022)

Good Credit Quality

Credit risk is always a concern in debt funds. Axis Ultra Short Term Fund invests in the highest quality papers. Nearly 85% of the scheme assets are in Sovereign (no credit risk) and highest rated debt (AAA) and money market (A1+) papers. Another, 9.3% of the portfolio is invested in AA rated papers.

Source: Axis MF Fund Factsheet, July 2022

Yields are attractive

Interest rates have been rising as the Reserve Bank of India aims to rein in inflation. The RBI has already increased interest rates by 150 bps till date (as on 19^th August 2022). The RBI Governor has indicated that further rate hikes are likely since inflation is still on the higher side. Rise in interest rates have been pushing short term yields higher. The yield of the 91 day T-Bill is 5.6% (up 8 bps MOM), while 6 month yield(up 16 bps MOM). The yield to maturity of Axis Money Market Fund portfolio is 6.32% (as on 29^th July 2022, source: Axis MF Fund Factsheet, July 2022).

Why invest in Axis Ultra Short Term Fund?

• The global economy has been in the grip of high inflation for a fairly long time now, due to extraordinary fiscal and monetary stimuli provided by Governments and Central Banks during the COVID-19 pandemic, supply chain disruptions caused by lockdowns during the pandemic and geo-political events namely, Russian invasion of Ukraine and economic sanctions on Russia.


• Though central banks around globe, primarily the US Federal Reserve, initially viewed the inflation as transitory caused by COVID led disruptions, both the Fed and RBI are now making inflation a priority in their monetary policies – both Fed and RBI have adopted a hawkish policy stance and have been raising interest rates.


• Rising interest rates have pushed short term debt and money market yields higher (as discussed in the previous section). Higher short term yields make Axis Ultra Short Term Fund more attractive investment options for investors with 3 months to 1 year investment tenures. The current yield to maturity (YTM) of Axis Ultra Short Term Fund is much higher than savings bank interest rate.


• The average maturity profile of Axis Ultra Short Term Fund is 0.4 months. So interest rate risk is fairly low. If yields rise in the near future, the fund can re-invest the maturity proceeds of maturing instruments during this period at higher yields. This can increase your returns.


• The credit quality of Axis Ultra Short Term Fund is good. 85% of the scheme assets are sovereign or highest rated papers.


• Axis Ultra Short Term Fund has no exit load. You can use this scheme as a source fund for STP to equity or aggressive hybrid schemes.

Who should invest in Axis Ultra Short Term Fund?

• Investors looking topark their idle funds for 3 months to 1 year


• Investors with low to moderately low risk appetites


• Investors who have minimum 3 month investment horizon

Investors should consult with their financial advisors if Axis Ultra Short Term Fund is suitable for their investment needs.