Money Market Mutual Funds – Concept, Types, Workings, Benefits, Features & moreLast Updated Date: Nov 17, 2022
Once you explore the benefits of this amazing Money Market Mutual Funds plan, you will be eager to park your money in it.
Let’s know more about this incredible Mutual Fund scheme. Before choosing the best Mutual Fund plan, most investors first prefer to raise some questions.
Here, “what is the safest Mutual Fund scheme” comes top in that list.
Though plenty of options are available in the market, which Mutual Funds scheme will derive the predictable results has always been a difficult subject.
Many people are probably looking for a short-term mutual fund plan that draws a fixed income in their account.
As compared to a long-term mutual fund scheme, a short-term plan is often recognized as the most favorable option.
Many investors might suggest you park money in Liquid funds. They see it as the best short-term investment plan in which, within 91 days, you can produce a good amount of returns.
Of course, it is a great option! But there sure exists an alternate option like Money Market Mutual Fund.
What are Money Market Mutual Funds?
Money Market Mutual Funds predominantly invest in debt securities, cash, and cash-related instruments.
Though, all the securities pooled in these funds represent a short-term maturity period that is less prone to market volatility.
Hence, these funds are referred to as fairly low or moderate risk mutual funds. In the market, these mutual funds are also regarded as the safest mutual fund plan.
However, since these funds invest in varying securities types, most of the time, the gains can be either taxable or tax-exempt.
It all depends upon the type of securities that these funds choose for investment.
Investors also call these funds a fixed-income mutual fund as they offer you high-liquidity at a minimal risk level.
In most instances, the risk and returns on a particular investment are predictable in Money Market Mutual Funds as these funds only invest in high-quality securities.
Altogether, it’s one of the best mutual fund schemes in which you can confidently park your money.
However, the instruments in these funds are well-noticeable about which we’ll discuss below.
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Types of Money Market Funds
Following are some of the popular instruments that can be found in Money Market Mutual Funds:
Certificate of Deposit or CD
Certificate of Deposit is quite similar to Fixed Deposit with the slightest differences. For instance, the investor can’t withdraw the amount until the CD investments become mature.
At the same time, fixed deposits allow you to withdraw the deposited amount. CDs are predominantly offered by Scheduled Commercial Banks, and these are freely negotiable as well.
Commercial Paper or CP
‘Companies’ or ‘financial institutions’ with a high credit rating in the past issue commercial papers. These papers are also known as promissory notes or unsecured instruments.
Commercial Papers are issued at a discounted price, whereas the redemption of these funds is done at face value.
Treasury Bills or T-bills
Backed by India’s government, Treasury bills are considered the safest instruments as the government itself is the issuer of T-bills.
Though, the rate of return obtained from Treasury Bills is comparatively lower. Still, as compared to all instruments in the funds, these are less risky.
Repurchase Agreements or Repos
Repurchase Agreement refers to an agreement under which the Reserve Bank of India lends money to the public sector banks or commercial banks.
Find details of other Types of Funds here
How do Money Market Mutual Funds work?
The origin of Money Market Funds dates back to the 1970s in the US.
These funds were designed to offer investors a better investment option from which they can earn a better return at a minimal risk value.
That’s why, over the last few decades, these funds have captured immense popularity.
Money Market Mutual Funds create a pool of securities by investing in risk-free and high-quality instruments to ensure better returns.
It serves excellent advantages; let’s see how.
Benefits of Money Market Mutual Funds
Now, let’s glance at the list of benefits that makes Money Market Mutual Funds comparatively a superior option.
Below, we will discuss how this MF scheme offers you a steady return, how it is less risky, and so on. The benefits include-
Easy access to the money market
As a retail investor, you can’t invest in these funds directly. Money market mutual funds are unlike liquid funds.
These funds ensure ease of access to the investors to a varying type of market securities representing maturity period up to one year.
Though, instruments in liquid funds come along with a maturity period of up to 91 days only. In this way, investors can capture a good amount of return from money market instruments.
The easy liquidity, no exit charges, and lock-in period are further advantages you get on investment in Money Market Mutual Funds.
Money Market Mutual Funds are a risk-free investment plan for investors.
These funds predominantly invest in money market instruments that are risk-free and come with a maturity period of less than a year.
These securities also represent the lowest credit risk; that’s why the investor can feel risk-free by all means.
It makes investment in these funds are less volatile, and an investor can expect a stable return for the long-term.
The steady returns from the Money Market Mutual Funds draw investors’ attention because the instruments in which these funds invest are less prone to market volatility.
It is mainly because MM mutual funds capture returns from the changes in the market prices. The lower interest will generate higher income for investors.
At the same time, the higher interest rate will yield a lower income for investors. The low credit risk associated with these funds also ensures the investment is less volatile.
Thus one can expect steady returns.
For a short-term investment plan, these funds can be a pretty good choice.
The ‘short duration period’ of ‘Money Market Mutual Funds’ makes them a highly favorable option because investors can earn better returns at a relatively less risk level.
Though the returns aren’t higher than any other mutual fund scheme, it is still better than returns from a saving account.
But one thing that is important to note down that these funds aren’t liquid funds. That’s why your investment horizon should be up to one year.
Find details of all types of Debt Funds here
Who should Invest in Money Market Mutual Funds?
Now, you might wonder whether you should invest in Money Market Mutual Funds or not? It is a very usual question that people often ask about.
If you are also a bit confused, ask yourself the following questions.
- Are you looking for an alternate short-term savings option?
- Do you have a surplus amount in your bank account?
- Can you invest that amount for up to one year?
- Do you want to generate regular income from short-term investment option?
If your answer ticks a green mark on all these questions, then, of course, the Money Market Mutual Fund will prove to be the best investment plan for you.
These funds predominantly invest in money market instruments, such as debt capitals, cash, and cash equivalent components.
Hence, this mutual fund scheme appears to be the safest investment option.
Investors who are looking for an alternate option rather than keeping the money saved in a saving account can find it the best short-term investment scheme.
Yet, make sure you invest in these funds only if you have a surplus amount in your account. You should be fully assured that for a whole one year you won’t need them.
The matter doesn’t end here. If you are willing to invest in Money Market Mutual Funds, you will have to take a few things into your consideration. Let’s have a look, what they are?
How to Choose the Best Money Market Mutual Fund?
Here are few ways to find out the best Money Market Funds –
Money Market Mutual Funds are risk-free, but not that much. These funds can be either less-risky or moderately risky.
MM mutual funds can face credit risk, interest rate risk, and reinvestment risk. For instance, the decline in interest rate will indicate a rise in the prices of assets.
Similarly, the fall in the interest rate will indicate a rise in asset prices. Owing to this, many times, investors can also invest in risky securities.
Money Market instruments offer you returns higher than returns you get from regular bank saving accounts.
Though, we can’t ignore that in many events, the returns probabilities are relatively lower.
The NAV (Net Asset Value) of the underlying securities can fluctuate with the changes in the interest rate.
If the price of assets increases, which is more likely to happen with the fall in interest rate, the investment can deliver a good amount of returns.
Without setting financial goals, you should never step into the financial market. Near in the future, you may realize the need for money.
If you invest in the Money Market Mutual Fund, you will not be allowed to withdraw the deposited amount. That’s why it can create trouble for you.
If currently, you have a surplus amount in your bank account, use it only if you won’t need them in urgency.
You can use the interest obtained from these funds for your numerous short-term goals.
The investment horizon of Money Market Mutual Funds is higher than liquid funds and lower than long-term investment plans.
For instance, you can invest in these funds from three months to a whole year. However, you can pick dynamic bond funds for a medium-term investment horizon.
Tax on Gains
Money Market Mutual Funds can be tax-exempt based upon the instruments in which these funds have invested. That’s why few instruments can be taxable as well.
Though, the tax rate is a subject of holding period as well. For example- if you want to stay longer in the funds, you can invite a fairly low tax on gains.
But if you wish to withdraw the fund before one year, the tax on capital gains will be higher. The tax is mainly categorized into STCG (Short Term Capital Gains) and (Long-Term Capital Gains).
If you hold the investment for less than one year, you may invite STCG tax, which is relatively higher. Else you will pay lower LTCG tax if you hold an investment for more than a year.
Check out all types of Hybrid Funds here
Can you Loose Money in Money Market Mutual Funds?
Usually, we view Money Market Mutual Funds as an absolutely risk-free alternative. The securities in this money market mutual fund investment comprise of lower risk value.
The duration of these funds is also less than a year. Still, credit-risk and inflation rate can impact the performance of these funds.
However, as compared to all other mutual funds, Money Market Mutual Funds are less risky.
But the unpredictable market patterns can bring a downfall in the returns obtained from these mutual funds.
These funds can be lower or moderately risky but can’t be an entirely risk-free alternative.
Money Market Mutual Funds – Conclusion
Money Market Mutual Funds can be the first choice for any investors who want to generate a good amount of returns at a minimal risk value.
These funds offer you return better than regular bank saving account returns. People who are looking for the best alternative of liquid funds can find this mutual fund scheme the best option.
You can park your money in Money Market Mutual Funds from three months to one year.
But, if you want to produce a higher return from your invested amount, invest for the long-term. It will be great else you may invite higher tax issues.
However, at a few points, the money market mutual funds prove to be a decent option.
Still, it has a few shortcomings, and you must consider them. For many investors, this mutual fund scheme can’t be an ideal option.
So try to proceed with your investment decision in Money Market Mutual Funds only if all the offerings of this MF scheme satisfy your needs.
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