Everything You Need to Know About Money Market Mutual Funds

Money Market Mutual Funds (MMMFs) invest primarily in high-quality short-term financial securities, as well as cash and cash equivalents. They are best suited to risk-averse investors with a three-month to the one-year investment horizon. Even though they do not guarantee profits, they do provide a predictable return that is usually deemed risk-free due to the high quality of the investments.

What are Money Market Funds?

Money market mutual funds invest in short-term securities with a one-year maturity. As a result, investors use it to manage their short-term liquidity requirements. Certificates of deposit, commercial papers, Treasury bills, and repurchase agreements are among the assets held by the fund. The majority of the investments are in fixed-income securities.

It is for this reason that these securities are referred to as money market instruments. Because money market securities have short maturities, they are extremely liquid. They are also quite safe because the issuers of these securities have a high credit rating.

Types of Money Market Securities

1. A certificate of deposit (CD) is a financial instrument that allows a person to deposit money with a bank for a set period and interest rate. A CD’s balance cannot be taken on demand, and the principal and interest are only available at maturity. CD interest rates are regulated by the RBI. A term deposit, often known as a fixed deposit, is a fixed-income-generating product.
2. Commercial Paper (CP) is a debt instrument issued by well-regarded businesses and institutions. Because they are unsecured, they yield a higher rate of return than Treasury Bills. They are sold at a discount and must be redeemed at face value at the end of the investment term, which is typically one to 270 days.
3. T-Bills (Treasury bills) are government securities. Experts consider it a risk-free investment because of the Central Government’s endorsement. As a result, when compared to other instruments, the return on these instruments is poor. T-Bills come in a variety of maturities, ranging from 91 to 365 days.
4. Repurchase Agreements (Repos) are a type of loan instrument that allows for short-term borrowing and lending. The sale takes place at a set price, only to be bought back at a higher price. The cost of investment or the repo rate is usually the difference between the two prices.

Who should invest in Money Market Mutual Funds?

Individuals with extra funds in their savings account or who want to put money into a fixed deposit. They can invest in money market mutual funds if they seek reliable growth rates over one year. These funds’ returns aren’t always guaranteed, but they’re usually predictable. The rate of return is also larger than that of bank deposits, allowing an investor to profit from excess cash.

Money market mutual funds are not for everyone. Before choosing these funds to invest in, there are a few things that an investor should think about.

Expenses

If the money is withdrawn within a week, Money Market funds may incur an exit load. Small investors are taking advantage of online mutual fund access to invest in money market funds for the short term instead of keeping cash in a savings account.

Because money market funds do not provide substantial returns, the expense ratio of the fund is crucial in determining earnings. Investing in funds with a lower expense ratio would be the most efficient.

Taxation

Money market instruments are taxed in India in the same way as debt funds are. The tax rate is determined by how long an investor owns the investment.

Short term capital gains (STCG) occur when an investment horizon is fewer than three years. The tax rate on STCG is determined by the investor’s income tax bracket. Long Term Capital Gains (LTCG) applies to investments held for more than three years. And, with indexation, the relevant tax rate is 20%.

Final Thoughts

Money market products are out of reach for individual investors in India. These instruments require a large initial investment. Money Market Mutual Funds are a type of mutual fund that allows individual investors to invest in such securities with small amounts of money. Experts believe it is a safer investment because it is issued by the government, banks, and large enterprises.

The return on these funds is predictable, even if it isn’t completely risk-free. Money market mutual funds are rated by independent bodies, making it easier for investors to choose funds. Investors with excess finances might put their money into these funds for short-term purposes. This is an alternative for an individual with a substantial savings account who is seeking a less risky investment. There are certainly alternative savings options, but money market funds offer additional advantages over savings accounts.