Have you ever wondered what the benefits of money market mutual funds are? If so, you’ve come to the right place. Given that mutual funds have gained popularity in the past two decades, I was interested in learning more about them. Among the varied fund offerings, money market mutual funds stood out as they have a comparatively short-term commitment in comparison to other funds.
Continue reading to understand everything relating to money market funds and the advantages.
A money market fund is a type of mutual fund. This fund directs money towards highly liquid vehicles, including high-rated debt-focused securities, cash, and cash equivalents. Ordinarily, such securities are linked to short-term maturities that fall below 13 months. A number of money market mutual funds hold securities like commercial paper, treasury bills, certificates of deposit, repurchase agreements and bankers’ acceptances.
These short-term investments provide investors with interest while maintaining a net asset value (or NAV) that amounts to INR 1. With these funds, investors gain access to a safe, short-term investment that is easily accessible. Also classified as short-term debt funds, money market mutual funds have the same tax implications as non-equity funds.
Affordable – Initial Investments and Expense Ratios Are Low -
Minimum requirements linked to money market mutual funds are comparatively lower than other mutual funds. In fact, some money market funds don’t have a minimum investment requirement or any transaction fees associated with buying and selling units. This fact highlights the appeal of these funds, especially when holding cash within a brokerage account. This is because these funds give investors some kind of yield on their money in the short term.
Flexibility of Investments - Investors are provided with a high degree of flexibility regarding these investments, which can be issued and withdrawn in short time frames. Investors with knowledge of the money market can also track it and can invest in funds accordingly to maximise their returns on their investments.
Liquidity - These liquid investments provide investors with dividends on a regular basis. Further, investors can access the principal amount of their investment with ease. Liquidity within this market permits investors to use the increasing rate of return in the market to their advantage in the short term. They can also select an appropriate money market fund accordingly.
Low-Risk Investments - Money market mutual funds are linked to low risks. These funds are ideal for you if you have a relatively low threshold for risk. The asset management companies responsible for managing these funds strive to ensure that there are limited risks investors are exposed to and that their interests are secure. It makes more sense for an investor to invest in this financial instrument rather than the stock market, where the risks are very high.
Superior Returns in Comparison to Savings Accounts - Money market funds provide relatively better returns than those offered by savings accounts held in banks. In fact, the returns drawn from money market funds tend to exceed other cash equivalents. That said, this is dependent on the net asset value, which continues to change, keeping in mind the rise and fall in liquidity within money markets. A money market fund’s NAV is also sensitive to changes in market interest rates.
Money market mutual funds ordinarily invest in several high liquidity instruments, some of which have been touched upon below.
Treasury Bills – These bills are short-term government securities and bonds and tend to have a maturity period of 91 days or 364 days. T-bills are issued by the Reserve Bank of India at regular intervals and are available at discounted rates. They can be redeemed at face value once they acquire maturity.
Repurchase Agreements – Also known as repo, these are the most popular money market instruments and are akin to lending within the money market. In this case, a dealer sells these securities to investors for a very short period and buys them back at a higher price. Their release helps control the supply of money.
Commercial Papers – Corporates, major financial institutes and primary dealers issue these papers to obtain funds for short-term needs. Banks back these with a promise to pay them back at face amount on the maturity date. Ordinarily, they are unsecured financial instruments.
Certificates of Deposits – These serve as agreements wherein you agree to deposit money in a bank for a fixed period of time. The more extensive the deposit time frame, the greater the interest rate commitment. The risks linked to these deposits are incredibly low.
Although there are no firm rules regarding who ought to invest in a money market fund, the following factors can be considered.
If you think that money market funds are ideal investments, begin by studying the different types of money market funds and shortlist those whose investment goals match yours. Next, you must assess the past performance of the shortlisted schemes prior to buying units of a given fund. Once you have purchased these units, track your investments, and check the taxes that apply to them. And the best part? Fi has all the information you need on the app, so once you’ve gone through and selected your mutual funds, you can start investing in a matter of minutes.
A money market fund refers to a kind of mutual fund that directs money toward incredibly liquid vehicles, including high-rated debt-focused securities, cash, and cash equivalents. These short-term investments provide investors with interest while maintaining a net asset value (or NAV) that amounts to ₹1. With these funds, investors gain access to a safe short-term investment that is easily accessible.
Yes. A money market fund can lose value if the market falls, which could result in investors losing their money. All mutual funds are subject to market risks.
Money market funds are linked to the following disadvantages.
