If you are among those investors who want a return better than a bank’s FD but don’t want to be exposed to the market volatility then the Money Market Mutual Funds (MMMF) are the investment vehicle you were looking for. Needless to mention that a bank’s FD (fixed deposit) gives you good returns without any risk factor but to get that desired return, you are to wait long. Unlike FD investments, an investment in Money Market Mutual Funds gives you considerable return with no to minimal risk exposure within in a short term. Let’s understand what Money Market Mutual Funds are and how it works.
More on Money Market Mutual Funds
Money Market Mutual Funds are a kind of fixed income funds which is considered the safest form of mutual fund investment. These are the lowest-volatility types of investments. The investment in money market mutual fund is done with the purpose of conserving the capital fund. The return from MMMF can be either taxable or tax-exempt. The taxation on MMMF is dependent on the kind of securities in which the fund has invested the money. The returns of MMMF are comparatively lower than other funds like equity fund but the returns are near to certain. Most of the people invest in MMMF to make a balance in the investment portfolio and to get a stable income.
Money market mutual funds (MMMF) invests money for short term hence more liquidity can be expected when you invest in this type of funds. This is part of debt fund which is open-ended and invests only in cash instruments or equivalents of the same. The average maturity of Money market mutual funds (MMMF) is of one year which ensures liquidity.
Brief on the Types of Money Market Instruments
The MMMFs generally invest in four types of instruments. The investment of MMMF in done in high secured liquid instruments such as Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Certificate of Deposits. Let’s know what these instruments are-
- Certificate of Deposit (CD)
A certificate of deposit is similar to banks a banks FD. A certificate of deposit is offered by scheduled commercial banks. The CD cannot be withdrawn before the maturity date.
- Commercial Paper (CPs)
Commercial Papers are issued by the companies with high credit rating. The Commercial Papers are also known as promissory notes. The commercial papers are issued at a discounted rate and redeemed at the face value.
- Treasury Bills (T-bills)
The Treasury Bills are issued by the government. These bills are issued by the government for a short term of 365 days. These are the safest forms of investment as T-bills are backed by the government to raise fund form the public. But the returns are comparatively low.
- Repurchase Agreements (Repos)
The investment in agreements is the next instrument where MMMFs invest. This is an agreement issued by commercial banks under which RBI lends money to the commercial banks. The sale and purchase of the agreements are done at the same time.
Things to Consider Before Investing in Money Market Mutual Funds
The return is the prime objective of investing in any investment instrument. Never to ignore the fact the Net Asset Value (NAV) fluctuates hence the guaranteed return in a mutual fund investment can be taken as a myth.
The cost an investor has to pay to the asset management company makes an impact on the returns. One has to pay the expense ratio to manage the investment portfolio. One has to check the expense ratio of the AMC before investing if a real high return is desired.
- The Purpose of Investment
The money market funds are short term funds. The money market funds are suitable for short-term to very short term investment horizons. The investment horizon is generally 3 months to one year.
The money market mutual funds can be a great instrument to diversify your investment portfolio. If you want to invest extra cash but don’t want a long lock-in period, you can opt for money market mutual funds.
- The Taxation
The returns on debt fund is a taxable income. The tax rate depends on the holding period of the mutual fund or the time you were invested in the fund. The different amount will be taxed if you stay for less than three years and more than three years.
The Bottom Line
The money market investment can give you lots of benefits when you need a short-term and relatively safe place to park cash. However, before you start investing in any kind of fund, you must be aware of the pros and cons. So take informed decisions on investing and make your money perform the best for you.