Money market Mutual Funds

Money market Mutual Funds: An open-ended mutual fund known as a money market fund, or simply a money market fund, invests in short-term debt assets such as US Treasury bills and commercial paper. Money market funds are managed with the aim of keeping an extremely stable asset value via liquid assets while providing dividend income to investors. Actual losses have been relatively uncommon in practice, despite the fact that they are not insured against loss.

Money market mutual funds (MMF) make investments in highly rated short-term financial securities, cash, and cash equivalents. Because of this, money market mutual funds are seen as secure investments or ones with little to no risk. These funds provide a predictable rate of risk-free return because to their investments in high-quality assets.

To address short-term financial requirements, money market mutual funds (MMMF) are used. These debt fund open-ended investments only trade in cash or cash equivalents. Because of their typical one-year maturity, money market securities are referred to as money market instruments.

The fund management makes investments in high-quality liquid securities such as certificates of deposit, treasury bills, and repurchase agreements. The primary goal of money market funds is to generate interest for unitholders. Money market funds’ main goal is to reduce the fund’s Net Asset Value (NAV) fluctuations.

Money market Mutual Funds

Money Market Instrument Types

The following are the most often used financial instruments:

• Document of Deposit (CD)

Scheduled commercial banks provide these time deposits, such as fixed deposits. The sole difference between FD and CD is that investors cannot withdraw money from CDs until they have reached maturity.

• Printed Paper (CPs)

These have a high credit rating and are issued by businesses and financial organisations. Commercial papers, commonly referred to as promissory notes, are unsecured financial instruments that are issued at a discount and repaid for their face value.

• US Treasury Notes (T-bills)

The Government of India issues T-bills to generate funds for a short-term of up to 365 days. The government backs Treasury notes, making them one of the safest financial products. T-bills have a low rate of return, commonly referred to as the risk-free rate, when compared to all other financial products.

• Repurchase Contracts (Repos)

Under the terms of the arrangement, the RBI loans money to commercial banks. It entails concurrently selling and buying an agreement.

A money market fund maintains a well-diversified portfolio of money market instruments in an effort to provide the maximum short-term income possible. These funds are open to investors with short investment horizons of up to one year.

People with a limited tolerance for risk who have extra money stashed away in a savings account may invest in money market funds. These investments may provide better returns than a typical savings account. Both corporate and individual investors may be the investors.

Money market funds won’t be the best choice if you have a medium- to long-term investing goal. Instead, you may choose balanced or dynamic bond funds, which are able to provide substantially greater returns.

Considerations for Investors

• Risk

Interest rate risk, credit risk, and reinvestment risk are all present for money market funds. When there is an interest rate risk, the price of the underlying asset rises when interest rates are falling and falls when they are rising. The fund manager has the option of investing in riskier assets with a greater chance of default.

• Return

A money market fund may provide better returns than a standard savings account. The returns, however, are not certain. The Net Asset Value (NAV) varies in response to changes in the general interest rate environment. A decrease in interest rates might result in higher asset values and profitable investments.

• Costs

The cost that fund companies charge to handle your investment is referred to as the expense ratio. The expenditure ratio has a maximum set by SEBI of 1.05%. The system tends to lower operating costs as the amount of assets under managed (AUM) rises.

• Financial Horizon

Money market funds are appropriate for investment horizons of three months to one year or less, which is extremely short to short term. You might invest in alternative debt funds, such as dynamic bond funds, if you have a medium-term time horizon.

• Financial Targets

Use money market funds if you need to make EMI payments or invest additional money while retaining liquidity. You may diversify your wealth by investing a tiny amount of it in these.

• Gains Taxes

Capital gains from debt fund investments are taxed. The holding period, or the length of time you were invested in the fund, determines the tax rate. When you remain invested for a shorter amount of time than three years, you experience a short-term capital gain (STCG).

When you hold an investment for more than three years, you will realise long-term capital gains (LTCG). Money market fund STCG is added to your income and taxed in accordance with your income tax bracket. After indexation, LTCG from money market funds is taxed at a flat rate of 20%.