Ultra-short duration funds v/s treasury bills: Which to choose?
What's the story
Ultra-short duration funds and treasury bills are two popular investment options for those looking for short-term returns. While both aim to provide liquidity and safety, their working and returns can differ significantly. Knowing these differences can help you make the right investment decision according to your financial goals and risk appetite. Here's a look at the two options, their benefits, and how they can fit into your investment strategy.
#1
Understanding ultra-short duration funds
Ultra-short duration funds invest in debt securities with a maturity of three to six months. They are ideal for investors looking for better returns than savings accounts or fixed deposits without locking in their money for long. These funds usually invest in commercial papers, certificates of deposit, and other short-term instruments. They come with low interest rate risk as they have a shorter duration.
#2
Exploring Treasury bills
Treasury bills (T-bills) are government securities that are issued at a discount to face value and mature in one year or less. They are considered one of the safest investments as they are backed by the government. T-bills are available in tenures of 91 days, 182 days, and 364 days, offering predictable returns based on the discount rate at which they are purchased.
#3
Comparing returns on investments
While ultra-short duration funds may offer higher returns than T-bills due to active management and diversification of assets, T-bills provide fixed returns based on the discount rate. The returns from ultra-short funds may vary depending on market conditions and interest rates, while T-bill returns are known at the time of purchase.
#4
Assessing risk factors involved
Ultra-short duration funds carry some credit risk as they invest in various debt instruments with different credit ratings. However, this risk is mitigated by investing primarily in high-quality papers. T-bills have no credit risk as they are backed by the government but may have some interest rate risk if held until maturity before reinvesting.
Tip 5
Choosing based on financial goals
Investors should choose between ultra-short duration funds and Treasury bills based on their financial goals, risk appetite, and liquidity needs. If you want higher returns with some risk tolerance, ultra-short funds may be the way to go. If you want guaranteed returns with no risk, T-bills may be the way to go.