What are Money Market Mutual funds?
Money market funds are the mutual funds that invest in high-quality money market securities
Investors who want to invest in low-risk mutual funds for a short period
In India, Money Market Mutual Funds (MMMF) are excellent and safest investment options available for retail investors with low-risk in the short term. These are used for managing short-term cash requirements, like working capital requirements and day-to-day operations in industries. It is similar to a bank account but not entirely risk-free. If you want to invest extra cash while maintaining liquidity, this is the right choice. These MMMFs also balance your overall portfolio by securing capital.
What are Money Market Mutual Funds or MMMF?
Before discussing Money Market Mutual Funds or MMMF, you must know what money market is all about. According to the Reserve Bank of India, it is a market where short-term financial assets or instruments of high-liquidity are traded. It facilitates short-term lending, borrowing, buying, and selling of funds with a maturity of one year or less.
Money market funds (MMMF) are the mutual funds that invest in high-quality money market securities or tools which are ultra-safe and of low risk, known as money market instruments. These are short term low-risk securities where the return is low but stable.
How do MMMFs work?
Money market funds include open-ended schemes in debt fund categories that deal in cash and cash equivalents. These are very much liquid, with short maturities like three months to one year time and minimal credit risk. The purpose of this fund is to maintain the capital or principal amount and, at the same time earning secured returns but low.
These securities are naturally of domestic and foreign issuers that can have a fixed or changeable interest rate. Money market mutual funds are considered the safest and secured investment with minimal to low risk offering a relatively risk-free return.
Like MFs, these funds are also managed by fund managers who invest in high-quality liquid instruments like certificates of deposit (CD), commercial papers (CPs), repurchase agreements (Repos), and treasury bills (T-Bills). The fund manager is responsible for managing the funds by minimizing the fluctuation of the Net Asset Value (NAV) of the fund and earns a return for the investor.
These are registered with SEBI and function as per the rules to protect the interests of the investor.
Types of MMMFs
Indian money market mutual funds typically consist of following asset types:
Bank Certificate of Deposit (CD)
Bank Certificate of Deposit (CD) is a saving instrument, just like bank fixed deposits that are offered by scheduled commercial banks. They have set maturity date and a fixed rate of interest. The difference between FD and CD is that investors cannot withdraw the Certificate of Deposit until maturity.
CDs are issued by scheduled commercial banks and some selected financial institutions. RBI monitors these instruments and issues guidelines from time to time.
Treasury Bills (T-bills)
Treasury Bills or T-bills are the oldest money market instruments that still make up the majority of the money market. Issued by the Government of India, these instruments are aimed at raising money for a short period of up to 365 days. Treasury bills are of two types, one that is based on maturity, and the other is based on type. As they come with government guarantees, these are one of the safest instruments. The rate of return on T-bills, which is also called the risk-free rate, is low in comparison to all other tools. T-bills do not offer any interest but issued at a discounted price than their face value.
Commercial Paper (CPs)
Commercial papers are unsecured money market instruments that are issued as promissory notes. These are issued by large corporations, companies, and financial institutions with high credit ratings. They issue CPs to raise the fund to meet their short term debt obligation (e.g., payroll). These are issued at the discounted rate, but you can get the face value on the maturity date mentioned on the instrument as per the guarantee given by issuing-bank or company.
Repurchase Agreements (Repos)
Under Repurchase Agreements or Repos, RBI lends money to commercial banks. It deals in the simultaneous sale and purchase of agreement.
Apart from these, there are Banker’s Acceptances, Bank Time Deposits.
Who must Invest in Money Market Mutual Funds?
Investors who want to invest in low-risk mutual funds for a short period may invest in these funds. They could be corporate as well as retail investors. These funds maintain a well-diversified portfolio of money market instruments and offer the highest short-term income.
Individuals having their surplus cash in a savings bank account can invest in money market funds. These have the potential to offer higher returns than a regular savings bank account.
Things to Consider before Investing
MMMFs have interest rate risk, credit risk, and reinvestment risk.
Money market funds offer higher returns compared to a regular savings bank account, but the performances are not guaranteed. The net asset value (NAV) fluctuates with overall changes in the interest rate. The prices of an underlying asset may increase with a fall in interest rates and deliver good returns.
SEBI has fixed the fee charged by fund houses to manage your investment or the Expense ratio at 1.05%. As the assets under management (AUM) increases, the scheme tends to reduce the cost of operations.
Tax on Gains
Investing in debt funds attracts taxable capital gains. When you stay invested for a period of fewer than three years, you make a Short-term Capital Gain (STCG). It is added to your income and taxed according to your income slab. Over that period, you make Long-term Capital Gains (LTCG) that are taxed at a flat rate of 20% after indexation.
MMMFs are safe and stable instruments issued by Governments, banks, and corporations. In the best case, it offers return double the savings account. Investing in money market funds is now also hassle-free and paperless. So grab the opportunity today!
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh