What are money market funds?Money market mutual funds (MMMF) are open-ended, short-term liquid investments which invest in safe and high-quality liquid money market instruments like treasury bills, commercial paper, certificates of deposits and repurchase agreements. It provides investors with reasonable returns for up to 1 year.
What choices of instruments do people have?
- Certificate of Deposit (CD) These are time deposits similar to fixed deposits that are offered by scheduled commercial banks. The only difference between FD and CD is that you cannot withdraw CD before the expiry of the term.
- Commercial Paper (CPs) Companies and other financial institutions with a high credit rating issue CPs. Also known as promissory notes, commercial papers are unsecured instruments which are issued at a discounted rate and redeemed at face value. The difference is the return earned by the investor.
- Treasury Bills (T-bills) T-bills are issued by the Government of India to raise money for a short-term of up to 365 days. These are the safest instruments as the government backs these. The rate of return, also known as risk-free rate, is lowest on T-bills.
Factors to consider
RiskThese funds suffer from interest rate risk, where the prices of underlying asset increase as interest rates decline and decrease as interest rates rise. The fund manager may invest in risky securities which have a higher probability of default.
Return :A Money Market Fund might give you more return than a savings account. However, there are no guaranteed returns. The Net Asset Value (NAV) fluctuates with changes in the overall interest rate regime. A fall in interest rates may increase the prices of an underlying asset and deliver good returns
Costs :Expense ratio refers to the fees charged by Money Market Funds to manage your portfolio. An ideal fund is one which keeps its expense ratio low. As the assets under management (AUM) increase, the cost of operations dwindles
Investment HorizonMoney Market Funds are only suitable for very short-term to short-term investment horizons .i.e. 3 months to 1 year
Financial Goals :In case you have to make EMI payments or invest extra cash while maintaining liquidity, you can use money market funds.
Tax on Gains :Investing in debt funds provides you with taxable capital gains. The tax rate depends on the holding period, i.e. for how long you stayed invested in the fund.
Who should invest?Those investors with surplus cash in a savings bank account, which they don’t require urgently, and low-risk appetite can invest in money market funds.
Explore Various Mutual Funds here.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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