A money market fund is a type of mutual fund that invests in highly liquid, near-term instruments. These funds entail cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity.
These funds are intended to offer investors high liquidity with a very low level of risk. They are not quite safe as cash but are considered low-risk on the investment spectrum.
Although they generate some income for investors, they do not offer significant capital appreciation. These funds are used to park money for the time being before investing elsewhere. So, they are not recommended for long term investment.
There are 22 money market funds with a total net assets under management of ₹1.22 lakh crore as on April 3, 2023, shows the AMFI (Association of Mutual Funds in India) data.
This is similar to a year ago data when there were 20 money market fund schemes with total assets under management of ₹1.30 lakh crore.
|Returns given by money market funds (%)
(Source: Morning Star; category average as on May 23, 2023)
The money market funds, as a category, delivered a return of 5.92 percent in the past one year, shows the Morning Star data.
These are the reasons for investing in them:
1 Safety of capital: These are safe investments. These are almost as safe as cash but infinitely safer than equity.
2 Short term investment: Since these mutual fund schemes don’t offer scope of capital appreciation, they are not considered good for wealth generation. So they are considered safe investment
3. Uncertain markets: When you are waiting for the equity markets to stabilise before you decide to invest, you have two options: keep investible corpus in cash, invest in safe debt instruments to stay ahead of inflation. Money market funds help you follow the second strategy.
4. Liquidity: These mutual funds are highly liquid with almost negligible risk. So, investors with low-risk appetite can explore to invest in them.
5. Expenses: These funds charge an expense ratio, which is generally lower compared to other types of mutual funds. This covers fund management fees, operational costs, and other expenses.
To sum up, investors who are either risk averse or who are waiting to shortlist equity funds to invest can park their funds in money market funds for the time being. This not only helps them keep their investment safe but allows them to earn some income on it at the same time.