What is Money Market Fund

What is Money Market Fund

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Key Takeaways

  • Money Market Funds are short term, high-quality Debt Mutual Funds.
  • They have a short investment horizon with a maximum maturity of up to one year.
  • Returns are relatively steady with low to moderate risk.
  • MMFs are ideal investments for investors with access to surplus cash.
  • MMFs are eligible for short and long-term capital gains tax.

Introduction

As an investor in the securities markets in India, you should be mindful of the fact that market securities yield high returns but are also subjected to market risks. As such, you should aim to mitigate your risks by investing in a mix of securities. One such type of investment that helps reduce your risk exposure is Money Market Funds. Keep reading to know more about Money Market Fund in India.

What are Money Market Funds?

Money Market Funds are open-ended short-term debt funds. It is a type of Mutual Fund which invests in money market instruments for a year and offer low-risk returns. MMF instruments include cash equivalents and debt securities with short-term maturity.

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Types of Money Market Mutual Funds

Treasury Bills

The Government of India issues Treasury Bills to raise capital for up to a year, with the aim of compensating for any short-term mismatches in expenditures. Since The Government of India backs Treasury Bills, they are deemed as relatively safe investments. However, their returns rate is lower than other Money Market Funds.

Commercial Papers

High credit-rated companies and financial institutions issue commercial Papers (CP), also known as promissory notes. CPs are legal instruments that state a written promise by the lender to the payee, a sum of money at a discounted rate. The payee redeems this sum of money at the prevailing face value. The payee makes profits from the difference between the discounted rate and the face value.

Repurchase Agreements (Repos)

This type of Money Market Mutual Fund in India is an agreement between the Reserve Bank of India and a bank and is referred to as Repurchase Agreements or Repos. Here, the RBI lends money to the bank to facilitate short-term loans. Two banks can get into a Repurchase Agreement as well.

Certificates of Deposit

Scheduled commercial banks offer Certificates of Deposits (CD), which is a type of term deposit. Unlike a Fixed Deposit, investors cannot withdraw the CD before maturity.

Things to Consider

  • Money Market Mutual Funds attempt to offer the highest possible returns in a short duration. Therefore, they serve as an ideal investment vehicle for investors with a low investment horizon of up to 1 year.
  • Money Market Funds are debt funds and come with interest rate risk, reinvestment risk and credit risk. Moreover, to increase profitability, the fund manager may invest in high-risk funds.
  • Generally, returns on Money Market Funds are lower. Additionally, fund managers charge an expense ratio. So, it is essential to invest in funds with the lowest expense ratio to maximise returns.
  • Like most mutual funds, Money Market Funds in India are eligible for Short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG) on redemptions.

Conclusion

Low default risk and short investment horizons make Money Market Funds a safe and excellent means to invest idle cash. You get higher returns than in a regular savings account. As an investor, you can integrate various types of Money Market Mutual Funds in your portfolio and reduce your risks.

Download digibank to create your savings account and choose from a range of debt mutual fund options to build wealth.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.

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