Money market mutual funds invest in high-quality short-term debt instruments
(up to one year), cash, and cash equivalents. As a result, money market mutual
funds are a secure investments with minimum to moderate risk
Longer loan terms result in better returns. Money market funds can
invest mainly in government securities, tax-exempt municipal securities, and
corporate and bank debt instruments. Money mutual funds may be the best
option for you if you’re seeking a secure, short-term investment.
What are Money Market Funds?
Money market funds or Money market mutual funds are mutual funds that invest in short-term financial instruments. They have a low volatility quotient, and the income generated from these funds is either taxable or tax-free. Hence, as a fixed-income mutual fund, money market funds are known for their low credit risk and short maturity.
To address short-term liquidity demands, money market mutual funds are employed. These are open debt funds and exclusively deal in cash or cash equivalents. Money market funds primarily seek to produce income for their investors. Therefore the basic goal of money mutual funds is to keep the fund’s Net Asset Value (NAV) as stable as possible
Benefits of Money Market Funds
- Ideal for an investment horizon of at least 3-6 months
- Low risk of loss if held for 6+ months
- These schemes tend to provide greater returns than Bank Fixed Deposits of similar terms.
- Money Market Funds are high-quality, short-term debt mutual funds.
- They have a one-year maximum maturity and a limited investment horizon.
- Returns are consistent, and the risk is low to moderate.
- The best money market mutual funds are excellent investments for those with extra cash.
- The government backs returns.
- These provide high liquidity and solvency.
Types of Money Market Funds
- Prime money market funds often hold short-term corporate and bank debt instruments.
- Government money market funds are very secure investments since they invest at least 99.5 per cent of their assets in government-backed securities.
- Predominantly, people invest tax-free money market funds in municipal bonds or debt issued by other organisations whose interest payments are tax-free.
Money Market Mutual Funds: Rules and Regulations
Some note-worthy rules of money market mutual funds are as follows:
- Like any other mutual fund, you must register money market funds with SEBI
- You must ensure that in advertisements, the statements cannot be misleading and guarantee assured returns
- Money market funds are set up as trusts with trustees, an asset management company, a custodian, and sponsors
- SEBI has put down a cap on the total amount that AMCs can levy on mutual funds.
Did you know?
A struggling financial consultant named Henry B. R. Brown invented money market funds in 1969 .
Who Should Consider Money Market Mutual Funds as an Investment?
A money market fund attempts to provide the maximum short-term income by keeping a well-diversified portfolio of money market instruments. Therefore, it is a good option for people with a low-risk appetite who have extra cash in savings.
If you’re looking for a medium- to long-term investment, a money market fund isn’t the best choice. Instead, you might invest in dynamic bond funds or balanced funds, which can provide you with better returns.
Word to Remember
Net Asset Value – The Net Asset Value or the NAV of a business is its total assets minus its total liabilities.
How are Money Market Fund Returns Taxed?
Money market funds provide investors with two ways to earn money: dividend income and capital gains. Dividends will be taxed according to the investor’s tax bracket at the beginning of the fiscal year. Capital gain is the difference between the price at which units were acquired and the price at which they were redeemed or sold. Capital gains can be taxed as either short-term or long-term capital gains depending on how long an investor owns the fund.
Short-term Capital Gains
If an investor stays invested for up to three years, capital gains on redemption/sale are called short-term capital gains and are taxed at the investor’s income tax slab rate.
Long-term Capital Gains
When a money market fund is redeemed or sold after more than three years, it is termed a long-term capital gain and the investor benefits from “indexation.” This implies that before computing the capital gain, the purchase price is adjusted to account for inflation (using a government-provided index). Long-term capital gains are now taxed at a 20% rate.
To maximise profits while preserving the fund’s capital by investing in low-risk debt and money market securities. Money market funds can help you keep the cash part of your investment portfolio liquid. This is because they are unique in that they are very liquid investments. As a result, money market funds offer more liquidity than CDs and Treasury bills while also providing the lowest risk. In addition, these funds have no maturity date and investors can liquidate them at any time, unlike CDs, which are held to maturity.
Yes, Money Market Mutual Funds are a safer investment option. These funds primarily invest in high-quality short-term debt products with minimal risk.
The average return on money market funds is between 5% and 7%, based on the top-performing money market funds over the previous three years. For larger returns, fund managers may choose to invest in riskier securities. However, there are additional aspects to consider before investing in a money market fund, like consistency in producing returns, relative size, the track record for analysis, the prior success of fund managers, expense ratio, and taxation.
Interest rate, default, credit, and reinvestment risks exist in the money market. The interest rate may rise, while the underlying security’s price or asset value may fall, or vice versa. These securities’ issuers may default on their payments.
A bank account is an account that the account holder owns and manages directly.
On the other hand, a money market fund is a sort of investment in which the asset is pooled and managed solely by the fund management. These funds are an investment instrument designed to attract regular investors to engage in India’s money market.
The money market funds are a smart option for investors with excess funds in their savings account and the ability to maintain the needed minimum balance account. Money market funds provide a better return than a savings account or fixed deposit, but they come with a higher risk and no guarantee of returns. Money market mutual funds are not for everyone. Before choosing these funds to invest in, there are a few factors that an investor should think about.
-Axis Bluechip Fund
– Mirae Asset Large Cap Fund
– Parag Parikh Long Term Equity Fund
– UTI Flexi Cap Fund
– Axis Midcap Fund
Although it appears hard to lose money in a money market fund due to the risk-free quality of the assets and stable returns.
The money market interest rate serves as the benchmark for money market funds which should be weighed against the security’s quality, predicted interest rates, and investment length.
You can withdraw money from a money market fund fast, but there is an exit load.
The procedure of redeeming the investment is quietly short, and Within 2 to 4 days, the redeemed amount will be credited to your registered savings bank account.
The Reserve Bank of India regulates the Indian money market, having authority over all Indian banks and the authority to define structures and norms for all forms of investment vehicles.
Money market funds are safer than stocks since they are more selective and focused on short duration. On the other hand, stocks are more volatile, and the asset value might suffer a large increase or decrease. As a result, the money market funds offer lower returns than equities, but they also have lower risk than the stock market.