When people want to start their journey as an investor, their eyes primarily focus on two terms – money that they can make and prevailing market conditions. Money market funds have an entirely different meaning in relation to short-term debt investing.
If you have a low-risk tolerance and are looking for investment avenues that help maintain the liquidity of your funds, you must know about money market funds. They are among the mutual fund options available to risk-averse investors.
Should you also invest in money market mutual funds? Let us help you understand what the money market is, followed by the money market funds definition.
What is the Money Market?
The money market refers to the specific side of financial markets that deals with short-term fixed-income instruments. Retail investors like you invest in this money market through debt funds.
Given below are some money market instruments whose maturities vary from overnight to a year:
Treasury bills or T-bills
Certificate of Deposit
Repurchase agreements or repos
Commercial Papers
What are Money Market Funds?
Money market funds are debt funds that invest in money market instruments maturing within a year. These funds also maintain adequate liquidity and are designed to allow the fund manager to generate potential returns while also controlling the risk by adjusting the lending duration.
Primary Features of Money Market Funds
Short maturity or duration
In general, the duration of money market funds usually ranges from one day to a year.
High liquidity
Because of their short maturities, money market instruments are highly liquid. This liquidity is extended to the benefits of money market funds that invest in these instruments.
Low-interest rate risk
The interest rate sensitivity of a money market instrument is directly related to its maturity. In fact, the longer the maturity period, the higher the interest rate risk can be. Since money market instruments have low short maturities, a relatively lower interest rate risk is associated.
Categories of Money Market Mutual Funds
Money market funds, being debt mutual funds, are classified into several categories based on
SEBI’s circular. Some of them are:
| Types of money market funds | Description |
|---|
| Overnight funds | These funds invest in the money market instruments that mature overnight |
| Liquid funds | These mutual funds invest in instruments that mature in less than 91 days |
| Low duration funds | These funds invest in instruments with a Macaulay duration portfolio between 6 to 12 months |
| Ultra-short duration funds | The instruments in which these funds invest have a Macaulay duration of the portfolio between 3 months - 6 months |
Should You Invest In Money Market Mutual Funds?
As per the money market funds definition, these funds invest in money market instruments. This makes them a suitable investment option for investors having low-risk tolerance and an investment horizon of up to one year. If you have idle funds kept aside for no good reason, you can invest them in money market funds to earn potential returns while also benefiting from high liquidity.
FAQs
Where do money market mutual funds invest?
Money market funds invest in instruments that mature within one year. These include commercial papers, certificates of deposits, treasury bills, etc.
Are money market funds safe?
Before you invest in money market funds, you must know that the investments are not entirely risk-free. However, the true level of risk depends on the fund you select and your market understanding. Hence, it is advisable to read the fund documents carefully before investing.
hat is the investment objective of money market funds?
The primary objective of these funds is to generate potential returns for the investors while ensuring sufficient liquidity.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
