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What precautions should I take while choosing an ultra-short-duration fund?

Here are some tips by Dhirendra Kumar on how to choose an ultra-short-duration bond fund

I am planning to invest Rs 50,000 in an ultra-short-duration fund. Can you please give some insight into such funds? Also, what precautions should I take while choosing this fund?
- Harish

Ultra-short-bond funds generally deliver better returns than bank deposits. Also, these funds score higher on liquidity. Notably, these funds have nothing to do with the equity market. They invest only in bonds having a short-term maturity period from where they can get predictable returns.

While choosing an ultra-short bond fund, do not choose the one with the highest returns. This is because the fund giving the highest return must be taking a risk, which is not visible right now. So, there are chances of loss there. And a fixed-income investor should avoid any unnecessary risks.

Another point to consider is the expense ratio. Choose a fund with the lowest possible expense ratio. Also, if you choose to invest in the direct plan through the website of a fund house, the expense ratio will be approximately 0.5 per cent to 0.75 per cent less than that of the regular plan of the same fund.