Money market mutual funds (MMF) invest in high-quality short-term debt securities, cash, and cash equivalents. Because of this, money market mutual funds are considered to be risk-free or low-risk investments. As these funds invest in high-quality securities, they offer a risk-free rate of return that is predictable.
What is a Money Market Mutual Fund?
The purpose of money market mutual funds (MMMF) is to meet short-term cash demands. These funds are open-ended debt funds that deal exclusively in cash and cash equivalents. The average maturity of money market securities is one year; hence, they are referred to as money market instruments.
The fund manager invests in high-quality liquid securities, including Treasury bills, repurchase agreements, commercial papers, and certificates of deposit. The primary objective of money market funds is to generate yield for their unitholders. The basic objective of money market funds is to limit the volatility of the fund’s Net Asset Value (NAV).
How does a Money Market Fund Work?
To comprehend how money market funds operate, it is vital to comprehend the duration idea in debt funds.
The longer a security’s duration, the more volatile its value and the greater its exposure to interest rate risk. The Securities and Exchange Board of India (SEBI) does not mandate any duration norms for money market funds (as it does for low-duration or short-duration funds), but because these funds invest in money market securities with a maximum maturity of one year, their duration is always less than one year. This is why money market funds are less volatile and have a minimal risk of interest rate fluctuations. In terms of interest rate risk, money market funds are somewhat below funds with a short duration.
Where do money market funds invest? Money market funds invest in a variety of money market instruments, including TREPs, commercial paper, certificates of deposit, treasury bills, government securities with remaining maturities of less than one year, and commercial bills. There are no SEBI standards regarding the credit quality of debt owned by a money market fund, but because money market assets have a low default likelihood, these funds are regarded as having minimal credit risk. The sole credit exposure comes from investments in corporate-issued commercial paper or commercial bills.
Sources of Income: Money market funds provide income through both interest and capital appreciation. The fund earns interest income from the interest payments made by the securities it holds. There is also the possibility of producing capital profits. Money market funds can actively control fund duration to capitalize on market interest rate fluctuations. When market interest rates fall, these funds are expected to increase their duration by increasing their exposure to longer-maturity debt, resulting in an increase in fund value. In order to avoid capital losses, the fund will likely retain more short-term debt when interest rates rise. However, keep in mind that money market funds cannot invest in bonds with maturities longer than one year, limiting their capacity and generating capital gains. This also indicates that money market funds are typically less volatile.
Money Market Funds Investments
The most common money market instruments are as follows:
- Certified Deposit Certificate (CD).
These are time deposits, such as fixed deposits, offered by commercial banks on the list. The sole difference between FD and CD is that CD cannot be withdrawn till maturity.
- Commercial Paper (CPs).
Companies and financial institutions with a strong credit rating issue this. Commercial papers are unsecured instruments that are issued at a discount and repaid at face value. Commercial papers are also known as promissory notes.
- Government Bills (T-bills).
The Government of India issues T-bills to raise short-term funds for up to a year. Treasury bills are regarded as one of the safest investments because they are backed by the government. T-bills have a low rate of return, commonly known as the risk-free rate, relative to all other securities.
- Repurchase Agreements (Repos).
Under this agreement, RBI loans money to commercial banks. It involves the simultaneous sale and buying of an agreement.
Top Schemes of Money Market Mutual Funds
|Tata Money Market Fund||5.78%||7,764.07|
|Aditya Birla Sun Life Money Manager Fund||5.74%||13,666.25|
|Nippon India Money Market Fund||5.73%||9,717.05|
|UTI Money Market Fund||5.62%||7,624.16|
|HDFC Money Market Fund||5.61%||13,732.66|
Source: AMFI (data as of 30/11/2022)
How to Invest in Money Market Funds Through Kuvera?
You can invest in direct mutual funds through Kuvera and avoid paying commissions. It is the best platform to invest in mutual funds as it is 100% free and helps you find the right investment for your life goals.
To invest in mutual funds via Kuvera, follow the given steps:
Step 1: Sign up at www.kuvera.in or on Kuvera app.
Step 2: Complete the KYC requirements and link your bank account.
Step 3: Click on MF in the Explore section to choose mutual funds for investment.