Money Market Mutual Funds

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How do Money Market Mutual Funds work?
Money market mutual funds (MMMF) are used to manage the short-run cash needs. It is an open-ended scheme in the debt fund category which deals only in cash or cash equivalents. These securities have an average maturity of one-year; that is why these are termed as market instruments.

The fund manager invests in high quality, liquid instruments like Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Certificate of Deposits. This fund aims to earn interest for the unitholders without leading to a fall in funds’  Net Asset Value (NAV).

Money market fund can be compared with savings account which comprises of cheque facility, the facility to redeem without lock-in period and electronic money transfer.

Types of Money Market Instruments
As an investor, you should know the various money market instruments:

a. Certificate of Deposit (CD)
These are time deposits like fixed deposits that are offered by scheduled commercial banks. The only difference between FD and CD is that you cannot withdraw CD before the expiry of the term.

b. Commercial Paper (CPs)
These are issued by companies and other financial institutions which have a high credit rating. Also known as promissory notes, commercial papers are unsecured instruments which are issued at the discounted rate and redeemed at face value. The difference is the return earned by the investor.

c. Treasury Bills (T-bills)
T-bills are issued by the Government of India to raise money for a short-term of up to 365 days. These are the safest instruments as these are backed by a guarantee of government. The rate of return, also known as risk-free rate, is low on T-bills as compared to all other instruments.

d. Repurchase Agreements (Repos)
It is an agreement under which RBI lends money to the commercial banks. It involves sale and purchase of agreement at the same time.

Who should Invest in Money Market Mutual Funds?
Money market fund seeks to provide the highest degree of short-term income via maintaining a well-diversified portfolio of money market instruments. Investors having a short-term investment horizon of up to 1 year can invest in these funds.

Those investors with surplus cash in savings bank account and low-risk appetite can invest in money market funds. These funds will give you higher returns than the savings bank account. The investors could include corporate as well as retail investors.

However, if you have a medium to long-term investment horizon, then money market fund won’t be an ideal option. Instead, you may go for dynamic bond funds or balanced funds which may give you relatively higher returns. Similarly, don’t think of money market funds unless you have short-term surplus cash which you don’t need urgently.

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