Money Market Mutual Funds pool money from various investors and invest it in short-term, low-risk debt instruments. These debt instruments typically mature within a year, making them highly liquid. Including Money Market Funds in your portfolio can be a smart way to balance your investments for both security and short-term needs.
What is a money market?
A money market is a financial system where institutions trade short-term debt securities. The majority of money market transactions are wholesale in nature and take place between financial institutions and companies. Usually, the market sees participation from corporations, governments, financial institutions and individual investors. They engage in short-term borrowing and lending that help meet their immediate cash requirements while managing liquidity.
Understanding Money Market Mutual Funds
Money Market Funds are low-risk funds that invest in safe, short-term IOUs (a written acknowledgment of debt) of corporations and governments. They offer stable returns and low risk. For example, by investing in the Axis Money Market Fund, you gain access to a diversified portfolio with high liquidity. It invests in high-quality papers and has an average maturity of 2-6 months.
How do Money Market Funds work?
Fund managers diversify your investments to generate interest, which is distributed to you as dividends. These funds aim to maintain a fixed price per share and keep their net asset value (NAV) stable. The yields of Money Market Mutual Funds vary, but you can check their 7-day yield for an annualised return, helping you compare funds.
Types of Money Market Mutual Funds
Treasury Bills (T-Bills): These short-term debt instruments are issued by the government and are considered to be among the safest investment avenues available. These funds are raised for a period of 365 days. However, although they offer low risk, they also yield lower returns than other money market instruments.
Commercial Papers (CPs): In India, they aren't directly issued by the government. Instead, they're short-term IOUs issued by reputable Indian companies to raise funds. CPs offer potentially higher returns compared to government T-Bills, but also carry slightly more risk as they are unsecured loans. Companies issue Commercial Papers at a discount, so you can profit from the price difference when redeeming them at face value.
Certificates of Deposit (CDs): These time deposits are offered by banks. You deposit your money for a fixed term (ranging from a few months to several years) and earn a guaranteed interest rate. Similar to Fixed Deposits, your money is locked in for a set period in exchange for a typically higher interest rate.
Repurchase Agreements (Repos): These are agreements where the fund sells securities to you with an agreement to repurchase them at a later date. This small difference acts like interest on the loan. It is a way for institutions to access quick cash while you earn a return on your holdings.
Benefits of Money Market Funds
Low risk: Money Market Mutual Funds invest in short-term debt instruments with a high credit rating, which makes them a relatively low-risk investment option.
Highly liquid: You can easily redeem your investment in a Money Market Fund, typically within one working day. This makes them a good option for parking your money for short periods.
Diversification: Money Market Mutual Funds help you efficiently diversify your portfolio. They have varying maturities to minimise your risk and reduce exposure to any single entity or maturity date.
Who should consider investing in Money Market Mutual Funds?
Short duration investment horizon: If you need access to your money within a year, these funds can be a safe place to park it. They offer decent returns before being reinvested.
Emergency fund: Having money readily available in a Money Market Fund can help cover unexpected expenses. If you are looking for a liquid asset to manage your cash flow, these Mutual Funds could be beneficial.
Risk-averse investors: If you are uncomfortable with the volatility of the stock market, Money Market Mutual Funds can offer a more stable investment option as they involve minimal risk.
Also Read: Decoding the taxation of Mutual Funds
Things to consider while investing in Money Market Funds
While there are several benefits to investing in Money Market Mutual Funds, there could be few drawbacks too -
Credit risk: Even though it is unlikely, there is still a credit risk. A good performing commercial paper could get downgraded if issuers fail to meet interest obligations, which can result in funds getting downgraded to debt or defaulted.
Not DICGC insured: Unlike Savings Accounts, Money Market Mutual Funds might not be insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Thus, in case of bankruptcy, your funds could be lost forever.
In conclusion, Money Market Mutual Funds are an excellent option to invest your money if you are looking for stable returns in the short term. Conduct thorough research to understand what Money Market Mutual Funds are and invest in these funds today!
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
