New investors are often on the lookout for low-risk investment options with good returns. They also prefer liquidity in the funds. Keeping these investment aspects in mind, many mutual fund houses have designed debt funds. Short-term debt funds cater to such requirements of new investors. Within short-term debt funds, Money Market Funds are preferred by new investors.
Money market mutual funds are a type of mutual fund that invests in short-term, low-risk debt securities such as commercial paper, treasury bills, and certificates of deposit. These funds offer stability and liquidity, making them a popular choice for conservative investors. As a beginner investor, it’s important to understand the different types of funds available to you. In this blog, we’ll dive into the world of money market mutual funds and help you determine if they are the right choice for your investment portfolio.
What are Money Market Funds?
Money market funds or money market mutual funds invest in short-term debt instruments, cash, and cash equivalents that have a high-quality rating. This is the primary reason money market mutual funds are believed to be safe or carry minimal to low risk. Since these funds invest in high-quality instruments, they mostly have predictable returns.
Money market mutual funds are ideal for investors looking to manage short-term cash requirements. These are mostly open-ended and deal primarily in cash or cash equivalents. Money market securities come with average maturity of one-year.
Money market funds mainly aim for maximum interest earnings for the unitholders. Parallely, they also aim to minimise the fluctuations in the Net Asset Value (NAV) of the fund.
Types of Money Market Investment Funds
Several factors determine the type of money market funds, including the term or maturity period and investing assets. Here, we will explore some commonly available money market funds:
- Certificate of deposit
CD or Certificate of deposit is like fixed deposits offered by banks. These are also called term deposits and are mostly offered by scheduled commercial banks. In case of an FD, premature withdrawals are permitted, but in a CD the funds are locked in for the agreed period.
- Treasury bills
We commonly know Treasury bills as T-bills under money market fund schemes. These are issued by the Government of India to raise capital for up to 365 days. Since these are backed by the government, they are considered as one of the safest money market instruments. However, it is worth noting that the risk-free rate on T-bills is also the lowest among all the other money market instruments.
- Commercial Paper
Another instrument for money market fund investment is commercial paper or CP. The financial institutions or companies which have a high credit rating are permitted to issue CP to their investors. A CP is also called a promissory note.
Although CPs are issued at a discounted rate and redeemed at face value, they are considered to be unsecured instruments.
- Repurchase agreements
A repurchase agreement is between a bank and RBI for facilitating short-term loans. It can also take place between two banks. These agreements cover both the sale and purchase of agreement at the same time.
Why invest in money market funds?
Here are some top reasons money market funds have gained popularity among investors.
- Low/Moderately Low Risk
Money market funds come with a low or moderately low risk level. This is because they invest in securities with maturities of up to one year. Since they primarily invest in money market securities, these funds offer low credit risk. Thus, money market funds generally offer stable returns combined with low volatility.
- Liquidity
Money market mutual funds offer the flexibility to withdraw money easily at any point. This gives investors easy access to cash whenever required. Money market funds invest mainly in highly liquid instruments.
- Returns
Compared to other cash equivalents, money market funds offer higher returns. However, the returns also depend on the Net Asset Value (NAV) which keeps changing due to rise or fall in the interest rates of the unit. When the interest rate drops, the price of the money market fund unit rises and investors can get good returns.
Who Should Invest in Money Market Funds?
Money market funds may be an ideal fit for some investors. On the other hand, these may not be the right options to include in an investment portfolio for some investors. Here are the type of investors who can benefit from investing in money market funds:
- Investors with short-term surpluses: Most money market funds offer steady returns and are therefore ideal for investors who have surplus funds which can be parked for short-term periods. The invested funds will most-likely generate steady earnings in the short run.
- Investors looking for steady short-term income: Money market funds come with the benefits of stability and liquidity. Investors who have a low-risk appetite can invest a portion of their wealth in these funds to earn steady short-term income.
- Investors looking to explore alternate short-term saving options: Money market funds can earn more than fixed deposits or savings accounts. This is because their income comes from interest payments combined with capital gains. Hence, investors who are looking to gain slightly higher returns than basic bank deposits can invest in money market mutual funds.
Recommended Money Market Funds
Based on historical performance, here are the top investment options within this fund category:
- UTI Money Market Fund
- ICICI Prudential Money Market Fund
- Aditya BSL Money Manager Fund
- Kotak Money Market Scheme
UTI Money Market Fund
About Fund
The scheme aims to earn reasonable income for investors by maintaining high liquidity levels in the investment portfolio comprising of money market instruments. It is suitable for investors who have a very short term investment horizon and are looking for alternative investment options to bank accounts/deposits.
| Inception Date | January 02, 2013 |
| Benchmark Name | CRISIL Money Market Index |
| Fund Manager | Amit SharmaAnurag Mittal |
| Expense ratio | 0.18% |
| Fund type | Open-ended |
| Risk | Moderate |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | 10-Year |
| 3.85% | 4.98% | 6.02% | 6.55% | 7.49% |
ICICI Prudential Money Market Fund
About Fund
The scheme aims to offer reasonable returns, by maintain a low risk profile and high liquidity levels. It invests primarily in money market instruments and debt securities. It is ideal for investors looking for optimum returns with high liquidity.
| Inception Date | January 02, 2013 |
| Benchmark Name | CRISIL Money Market Index |
| Fund Manager | Nikhil KabraRahul Goswami |
| Expense ratio | 0.21% |
| Fund type | Open-ended |
| Risk | Low to moderate |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | 10-Year |
| 3.82% | 5.07% | 6.05% | 6.53% | 7.46% |
Aditya BSL Money Manager Fund
About Fund
The scheme aims to generate regular income by investing primarily in money market instruments. It is a moderate risk and low return investment avenue suited for investors who wish to explore alternatives to bank deposits.
| Inception Date | January 02, 2013 |
| Benchmark Name | NIFTY Money Market Index |
| Fund Manager | Mohit SharmaKaustubh GuptaAnuj Jain |
| Expense ratio | 0.21% |
| Fund type | Open-ended |
| Risk | Moderate |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | 10-Year |
| 3.96% | 5.34% | 6.29% | 6.75% | 7.62% |
Kotak Money Market Scheme
About Fund
The scheme aims to offer returns to investors through investment in money market instruments that have maturities of up to 1 year. It is best suited for investors who want to invest for a very short duration and are looking for alternatives to bank accounts/deposits.
| Inception Date | January 02, 2013 |
| Benchmark Name | NIFTY Money Market Index |
| Fund Manager | Deepak Agrawal |
| Expense ratio | 0.26% |
| Fund type | Open-ended |
| Risk | Moderate |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | 10-Year |
| 3.77% | 4.76% | 5.87% | 6.41% | 7.41% |
Things To Know Before Investing In Money Market Fund
Here are some important factors to consider before investing in money market funds:
Are Money Market Funds Risk Free?
Money Market Funds concentrate most of the investment in debt instruments and hence involve risks that are similar to debt funds. Some risk factors are interest rate risk and credit risk. Also, for generating better returns, the fund manager may invest in instruments that have a slightly higher risk factor. Thus, money market mutual funds are not entirely risk-free.
Expense Ratio
Since the returns offered by money market funds are not very high, the expense ratio helps in determining an investor’s earnings from the fund investment. Expense Ratio is calculated as a percentage of the total assets held by the fund. This is charged by the fund house for offering fund management services. Ideally, an investor looking to maximise returns should invest in funds which have a lower expense ratio.
Investment Time Horizon
Money market funds are ideal for investors with an investment horizon of 90-365 days. Investors who want to stay invested in the long run should explore equity funds.
Taxation
Investors who hold the units of the fund for a period of maximum three years may earn capital gains, which are called short-term capital gains or STCG. This is added to the individual’s total taxable income and is taxed as per the prevailing income tax slab. If an investor holds the units of the scheme beyond three years, then the capital gains are called long-term capital gains or LTCG. LTCG is taxable at 20% along with indexation benefits.
End Note
Investing in money market mutual funds is easy and can be done offline or online. Investors can now invest in money market mutual funds easily through their smartphones by downloading the Fisdom app. It allows hassle-free and paperless investing process which is convenient for new investors.
FAQs
Money Market Funds are primarily debt funds that invest in various money market instruments for a period of up to 1 year. The fund managers of such funds aim to generate higher returns while maintaining risk levels under control by adjusting the lending duration.
Since money market mutual funds primarily invest in short-term debt instruments, these are mostly low risk and offer predictable returns. Hence, these are ideal for investors who have a low-risk appetite and want safe avenues of investment.
Money markets mutual funds invest in following types of money market instruments:
Certificates of Deposit
Treasury Bills
Call money
Banker’s acceptance
Repurchase agreement
Money market funds and liquid funds are similar because both fall under the categories of debt funds. However, there is a slight difference in both with regards to their maturity periods. Money market funds come with a maturity period of about one year, while liquid funds mature within 91 days or lesser.
