As safe as it gets
Ultra short term debt funds come with a host of seat belts, air bags and emergency brakes. There might be accidents but there is much to stop you from getting hurt
By Research Desk | Mar 6, 2017
Ultra short term debt funds are not guaranteed products. However a robust safety mechanism is embedded in their very design. These types of funds invest in a diverse set of highly rated securities of a short maturity, thereby curbing the twin risks of companies failing to pay back their lenders and interest rates being hiked. These funds also have procedures that maintain a high level of liquidity in case of lots of people wanting their money back at the same time.
And what about their regulation? This is maintained in pretty tight fashion by SEBI, just as banks are monitored by the RBI. It is interesting to note that even bank deposits themselves only carry a guarantee of upto Rs 1 lakh and co-operative sector banks have been known to default time and again. Ultra short term debt funds by comparison are fairly safe without the promise of a formal guarantee.
But what has happened in practice? Is all this just paper comfort? Well, the figures show that in last 10 years, ultra short term debt funds on average have never delivered negative annual returns with the lowest return coming in at 2.2% in 2006. Their average return has been a reasonable 7.5% per annum. Investors have sometimes been hit by events in specific funds but these instances are so rare, you can count them on your fingertips.