Money Market Mutual Funds

  Mutual fund investments are one of the most preferred choices of investments for investors as it is the easiest and most comprehensive way to create a diversified portfolio. There are different categories of mutual funds to meet the specific requirement as per the time horizon, risk appetite, and investment purpose. Broadly, mutual fund either in invest in equities, debt, or both debt and equity. Additionally, they can either be open-ended or closed-ended schemes.

What are Money Market Mutual Funds?

Money Market Mutual Funds are open-ended mutual fund schemes that invest in short-term debt instruments. As the name suggests, Money Market Mutual Funds invest in high- quality money market instruments/securities such as commercial papers, treasury bills, certificates of deposit, etc. with short-term maturity usually less than a year. 

Money Market Funds aim to serve a cash-like position for investors with very low volatility to ensure capital protection. These mutual funds are a stable investment vehicle for investors for short-term income generation with an investment horizon ranging from three months to one year.

What are Money Markets and different types of money market instruments?

Money Market is an important segment of the Indian Financial Market for borrowing and lending of short-term funds. The maturity of money market instruments ranges from one day to one year. Transactions in money markets are high, and the market is predominantly for large players. 

After understanding the money market mutual funds meaning, one needs to know the different types of money market mutual funds. As retail players have limited scope for direct participation in money markets, the different types of money market instruments are the best way to invest in such investments.

1. Treasury Bills: Treasury bills, also known as zero-coupon bonds, are issued by the RBI on behalf of the central government to fulfill short-term fund requirements. T-bills are issued at a discount and paid at par on maturity. These are the safest as they are backed by the government.

2. Commercial Papers: Commercial Papers are unsecured promissory notes issued by companies and other financial institutions with a maturity period of 15 days to a year. As they are unsecured papers, these are issued by companies with high credit ratings. These papers are issued at a discount and redeemed at face value. 

3. Certificate of Deposits: Certificate of deposits are short-term instruments which are issued by commercial banks and other financial institutions to individuals and companies, when the demand of credit is high, but the growth in deposits is slow, thus resulting in tight liquidity of the financial institutions

4. Repurchase Agreements (Repos): Repurchase Agreements is an agreement to facilitate short-term loans under which RBI lends money to other banks. The agreement can also exist between two banks. Simultaneous sales and purchase of agreement are involved in the case of the repurchase agreement. 

These are the four types of money market mutual funds available in India.

Key features of Money Market Mutual Funds

1. Short-term debt instrument: These funds invest in very high-quality, short-term money market instruments, and cash equivalents.

2. Low-Risk Investment: As these funds carry very low risk, so the rate of return is near the risk-free rate of return
Better returns than Bank Accounts: The returns offered are better than those offered by bank FDs or savings account

3. Allow retail investors to participate in Money Markets: They provide retail investors an opportunity to invest in money market instruments which are other inaccessible to them due to high ticket size
4. Liquidity: Money market mutual funds are highly liquid and ideal to park short-term emergency money

Factors to consider before investing in the different types of Money Market instruments

1. Investment Horizon: For any investment time horizon of investment is very important. Money market mutual funds are specifically designed to meet the short-term investment needs of investors. So, you should invest in these funds only if your investment horizon is of three months to a year.

2. Risks: Money market mutual funds are safe investment options, but these funds are subject to interest rate risk affecting the price of the underlying instrument due to an increase or decrease in the interest rate. Money market instruments such as CD are unsecured loans, and hence creditworthiness of the issuer is essential.

3. Returns: Money market mutual funds have the potential to offer higher returns than a regular savings account, especially when the interest rates are falling. The NAV of the fund depends on the prevailing interest rate. A fall in the interest rates means that the price of the underlying assets will increase resulting in higher returns from the funds.

4. Expense Ratio: Cost plays an important role as it affects the overall returns generated by these funds. The expense ratio is the fees that the fund charges to manage the portfolio. The maximum limit for expense ratio as prescribed by market regulator SEBI is 2.25%. 

CONCLUSION

If you are looking at investing your surplus in a safe investment for better returns than traditional bank deposits and also highly liquid instruments, then money market mutual funds are the best option for you. A good investment broker like IndiaNivesh provides a complete list of top-performing money market funds.

Here is the list of top-performing money market funds:

Aditya Birla Sunlife Money Manager Fund
Kotak Money Market Scheme
L&T Money Market Fund

IndiaNivesh provides the ideal platform to meet your investment needs. Open your Demat account with us by completing the simple documentation and KYC form and get started now.

 

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.  

Ref: https://www.indianivesh.in/kb-blog/money-market-mutual-funds