Money market funds can be a good choice for investors who want to park their surplus cash in a low-risk instrument for a limited period. So, let’s delve deeper into what is a money fund and important information related to investing in such a fund.
What Is a Money Market Mutual Fund?
According to SEBI categorization guidelines on mutual funds, money market mutual funds are categorized as debt funds.
These open-ended funds invest majorly in money market instruments with a maximum maturity period of 1 year. Typically investing in good quality money market instruments, these short-term debt funds can potentially provide stable returns at low risk.
Money market funds primarily focus on reducing the variability of the fund's Net Asset Value (NAV) while aiming to earn predictable interest for the investors.
Know What is Debt Fund?
Different Types of Money Market Instruments
If you want to understand better what is a money market fund, it's crucial to understand the various types of debt instruments such funds invest in.
Commercial Papers (CPs)
Companies and financial institutions with high credit ratings issue commercial papers to typically raise funds for meeting short-term needs of up to 1 year. Also referred to as promissory notes, these are unsecured instruments that are typically issued at a discounted rate and repaid at their face value.
Treasury Bills (T-Bills)
These are short-term debt instruments issued by the Government of India to raise funds. They have a maturity period of up to 365 days. Since they are backed by the Indian government, they are considered one of the safest money market instruments.
Certificate of Deposit (CDs)
These are unsecured money market instruments issued by banks and governed by RBI directives. While similar to bank fixed deposits, CDs differ because you can't withdraw them before maturity. Another important difference being CDs are negotiable, unlike FDs.
Following are some important facts about CDs.
- The minimum investment amount in CDs is ₹5 lakhs and multiples of ₹ 5 lakhs thereafter.
- They are issued only in dematerialized form.
- The minimum duration is 7 days, and the maximum duration is 365 days.
Repurchase Agreements (Repos)
The Reserve Bank of India offers funds to commercial banks through an agreement known as a Repurchase Agreement or Repo. It involves the simultaneous sale and purchase of the agreement. Commercial banks usually use Repos to manage their liquidity requirements.
4 Easy Steps to Invest in Money Market Funds?
1. Create a user account online with the Asset Management Company.
2. Fulfil all the KYC requirements.
3. Select the money market fund you want to invest in.
4. Purchase the required fund units by transferring the investment amount to the fund house through digital banking.
Who Should Invest in a Money Market Fund?
Money market funds can suit investors looking for better returns than a traditional savings account. While these funds can’t be deemed entirely risk-free, the risk factor can be significantly low compared to other types of market-linked products.
These funds can also suit investors who need quick access to their funds in case of an emergency.
Factors to Consider Before Investing in Money Market Funds
Investment Horizon
Money market funds are short-term investment options where 6 to 12 months can be considered a good investment horizon for these funds. Therefore, these funds should not be considered a tool for long-term capital appreciation.
Returns
These funds are known for their predictable albeit low-return potential. However, money market funds can typically offer better returns than a traditional savings account.
Expense Ratio
The expense ratio is the annual fee charged by the fund house for managing the fund. It’s important to carefully examine the expense ratio before investing in a fund. Keep an eye out for a lower expense ratio, the fund’s reputation, and past performances.
Click Here to know more about Expense Ratio
Risk Factor
The investment risk is low in money market funds. However, they shouldn’t be deemed as completely risk-free. Therefore, it’s important to consider the credit risk associated with debt securities before investing in these funds.
Capital Preservation through Money Market Funds
For a knowledgeable investor, money market funds can be helpful in managing surplus funds. You can also use these funds to create a contingency fund for the future. Most importantly, investors with a low-risk appetite can better protect their investments from market fluctuations by keeping their money invested in these funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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