Beginners’s Guide on Money Market Mutual Funds

Money Market Mutual Funds

Do Money Market Mutual Funds fulfill dreams of Indian households. Do you still looking for earning more interest than your savings bank account but still wants to keep liquidity and safety. For all the questions above, the answer lies in the below article.

What are Money Market Mutual Funds?

Money Market mutual funds are very short-term or short-term market instruments with maturity of 3 months to 1 year. Money market mutual funds are an open-ended funds which invests money in super safe and very high quality liquid instruments like:-

  • Treasury bills: Government of India issue treasury bills to meet short-term needs. Safest instruments as it has backing of government of India. Rate of return is low;
  • Commercial Paper: High credit rating companies and financial institutions issue Commercial paper. Issued at discount and redeemed at face value and the difference is the return an investor gets;
  • Certificates of Deposit: Scheduled commercial banks offer certificate of deposits;
  • Repurchase Agreements (Repo): When RBI lends money to commercial banks to increase liquidity in the market.

But how long I need to be invested in Money Market Mutual Funds?

These funds have an average maturity of up to one year. Means you will get returns maximum post 1 year.

How these funds are different from Savings Account, where also I get interest credited at the end of each year?

The main aim of these funds is to earn interest for investors. There instruments always carry some risk and hence investor discretion is highly sought.

But are there any challenges also or this is a guaranteed return?

No mutual fund carry guaranteed return and this is the beauty of it. More the risk more the return. However, you should always analyze your risk appetite and invest accordingly.

If you have Rs.10,00,000 sitting in your saving account, you should immediately take out at least 70% from it and invest in different mutual funds.

Also you need to keep a track on the Expense Ratio while selecting any of these funds. Expense Ratio directly impacts your returns on the fund. However recently SEBI has put a cap of 1.5% on Expense Ratio.

Ok. Can you explain risk of this fund in detail?

Since the purpose of this fund to earn extra interest, so it carries some interest rate risk. Let me explain. By interest rate risk, I mean when interest rates fall in any country, the price of the underlying asset increase and can deliver good returns. Hence if you expect that interest rates would fall, you should look for investing in such funds.

Ok. What to do if I need to earn more return and have an investment horizon greater than 1 year?

If you have a medium or long-term investment horizon, then money market mutual funds are not the right strategy. You should then go for hybrid or balanced mutual funds, which would provide much better returns than this fund.

Just remember the below quote before investing in Money Market Mutual Funds:-

“If you have surplus cash in your savings account and looking for safe deposit with higher yield, then go for Money Market Mutual Funds”

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Author: AK

Ankit is a part-time blogger with full-time employment in an investment bank. He is a CA with interest in personal finance topics.

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