The first rule of investment is that the risk and returns go hand in hand. Conservative investors who want to play safe have to let go of an opportunity to earn a higher return. One of the investing options for such investors is money market funds.
What are money market funds?
Money market funds are mutual fund schemes that invest in short-term debt instruments, cash and cash equivalents which mature in a year’s time. These funds offer a fixed rate of risk-free return because they invest in high-quality assets.
As a result, money market mutual funds are seen as secure investments that barely carry any risk.
There are 22 money market mutual funds in India as of now. Their average assets under management (AUM), as of December, hover around ₹1.10 lakh crore. A year ago, this figure was around ₹1.18 lakh crore.
|Number of mutual fund schemes||Avg AUM (Dec 2022)||Inflow in Dec ( ₹crore)|
|22||₹1.10 lakh crore||-915.99|
In the past one year, most money market funds delivered a return of 4-5 percent per annum. Some of the popular funds in this category include Axis Money Market Fund, Edelweiss Money Market Fund, HDFC Money Market Fund, Nippon India Money Market Fund, Tata Money Market Fund and UTI Money Market Fund.
Some of the constituent securities of these funds are government bonds, certificates of deposit (CDs), commercial papers (CPs), state development loans (SDLs), among others.
Purpose of investing
There are primarily three purposes of investing in money market instruments. First is the protection of capital as the investors do not want to take a considerable risk. The second purpose is to earn slightly more than what one can earn from a savings bank account or perhaps term deposits.
Finally, investor would need this money in a year or so, and hence – can’t afford to lock the money in an equity instrument.
ALSO READ: Equity vs Debt: Which one is suitable for long-term investments
When all these three conditions are fulfilled, one can explore investing in a money market instrument.
However, if an investor’s financial goal is due in two to three years’ time then one can explore short duration debt funds.
One of the key features of money market funds is that they are not risky at all and hence, not lucrative. However, the returns they offer are usually higher than what is given by saving bank deposits and even most fixed deposits (FDs).
So, conservative investors with a short horizon of one year or so can invest surplus cash in money market instruments which they don’t want to keep in term deposit.
To summarise, we can say that money market funds are low risk debt funds that invest in financial instruments that mature in a year’s time. So conservative investors with a financial goal of one year or so can explore this as a viable investing option.