What are money market funds?
Money market funds are mutual funds that invest in securities that are safe, liquid, stable, low-risk, and low-return. Basically, these are investment opportunities ideal for short-term periods, where your money can bring you better returns than bank deposits for the same maturity period.
How do money market funds work?
Money market funds invest in short-term debt instruments like treasury bills, commercial papers, and certificates of deposit, ensuring low risk and volatility. The investments are pretty liquid, but naturally, the returns are lower. Investors can buy and sell shares/units of these funds. The Net Asset Value (NAV) of these shares/units, calculated daily, determines the price at which these units are sold/bought.
Advantages and disadvantages of money market funds
The advantages of money market funds are:
1. Liquidity: They can easily be converted into cash.
2. Safety: Funds invest their monies only in low-risk, short-term debt instruments, thereby minimizing the risk.
3. Yield: Money market funds give better returns than bank savings accounts and certificates of deposit.
4. Convenience: They can be bought with ease through brokerage firms and financial advisors.
The disadvantages of money market funds are:
1. Low returns: The yield will be lower than other investments like bonds and shares.
2. Inflation risks: Over time, the returns may fall short compared to the inflation rate, reducing the purchasing power of the investor’s money.
3. Credit risk: Though these funds invest only in low-risk securities, there is the risk of the issuer failing to honor the debt. The risk is especially evident in commercial papers issued by corporations as they are unsecured.
4. Interest rate risk: Any changes in the interest rates could impact the value of the money market fund investments, leading to lower returns, affecting the NAV price of its units/shares.
5. Regulation risk: Any changes in the regulations governing the money market funds could impact the returns.
Types of money market instruments in India
The different types of money market instruments in India are:
- Treasury Bills (T-Bills): They are short-term debt instruments issued by the State and Central Governments.
- Commercial Papers (CPs): Commercial Papers are unsecured, short-term debt instruments issued by corporates.
- Certificates of Deposit (CDs): Short-term deposits with banks that offer a fixed rate of interest.
- Repurchase Agreements (Repos): Short-term loans where the borrower sells specific securities to lenders with a clear agreement to repurchase the same securities from them at a higher price.
- Government Securities (G-Secs): Debt securities issued by the government to raise funds for specific projects.
- Collateral Borrowing and Lending Obligations (CBLOs): Secured money market instruments issued by the Clearing Corporation of India Ltd (CCIL).
- Bankers’ Acceptance: Short-term debt instruments created by banks when accepting time drafts.
Top-performing money market funds in India
Here are some of the top-performing funds in India. Please note that the names are listed in no specific order of importance. The investor is also advised to consult financial experts before taking a decision because the market can be dynamic and vulnerable to changes constantly.
- Aditya Birla Sun Life Money Manager Fund
- HDFC Money Market Fund
- Nippon India Money Market Fund
- SBI Savings Fund
- UTI Money Market Fund
- ICICI Prudential Money Market Fund
- Franklin India Savings Fund
- Kotak Money Market Fund
Who should invest in money market funds?
Since these funds invest in money market instruments that are predominantly focused on safety, liquidity, and stability, the returns will be low. The funds will be ideal for investors with surplus funds in their savings accounts for which they do not have immediate commitments.
How to invest in money market funds?
Investing in these funds is very much like investing in shares. The investor needs to get in touch with a brokerage house or a mutual fund company, and they will take care of the formalities.
Things to consider before investing in such funds:
1. Risks and Returns: As these money market funds invest in debt securities, you need to ensure that you are protected from interest rate risk and credit risk. Risks stem from a change in interest rates or when the issuer of the invested securities defaults on payment. In their quest for higher profits, some fund managers may take greater risks by investing the monies in instruments promising better returns. Ensure to scrutinize the portfolio of the funds you are investing in.
2. Expense Ratio: Investors would do well to remember that these funds offer lower returns. Check how much the fund charges for the management services rendered. The fund charges a small percentage of the total assets managed, called the expense ratio. A lower expense ratio will certainly maximize your returns.
FAQs
What are the types of money market funds?
There are two types that are common in the Indian market. They are:
a. Liquid funds
These funds invest their monies in highly liquid money market securities, such as T-Bills, CPs, CDs, Repos, G-Secs, etc.
b. Overnight funds
These funds deploy their monies in securities that mature the very next day, such as call money. The liquidity is very high, and the risk is quite low.
What is money market, and what are its features?
Instruments like T-Bills, CPs, CDs, Repos, and G-Secs trade on the money market.
High liquidity, safety, assured returns, multiple instruments, and government regulations mark these instruments.
What are the five functions of the money market?
The five functions of the money market are:
1. To finance trade
2. To finance industry
3. To invest profitably
4. To enhance commercial banks’ self-sufficiency
5. To lubricate central bank policies
What is the money market fund?
A money market fund is a type of mutual fund investing in highly liquid, short-term instruments like Treasury bills. It provides stability and modest returns.
What is money market fund detail?
A money market fund is a type of mutual fund investing in short-term, low-risk instruments. It offers liquidity, stability, and modest returns, often used for preserving capital.
What is money market fund suitable for?
Money market funds are suitable for investors seeking low-risk, short-term investments. Ideal for preserving capital, providing liquidity, and earning modest returns with minimal volatility.
What is difference between money market and mutual fund?
Money market funds invest in short-term, low-risk securities, providing stability. Mutual funds, diverse in assets, involve various securities for potential higher returns, carrying more risk.
