Money Market Mutual Funds

As an investor, you may have both short- and long-term financial goals to work towards. While the latter has several options, short-term investment vehicles require more care. Thankfully, money market mutual funds are a smart option for most, even if you have a low-risk appetite. 

These are mutual funds that have a maturity dating up to a year. The name, “money market”, comes from the fact that these instruments solely delve into cash and cash equivalents. These are debt funds that are open-ended in nature. 

These funds are attractive to all types of investors, mainly due to their low or minimum risk attributions. Some common examples include repurchase agreements, certificates of deposit, treasury bills and others.

Read on for a comprehensive overview of money market funds.

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What are Money Market Mutual Funds?

Money market mutual funds belong to the class of debt instruments. The main characteristic of the instruments in these funds is that they have a short maturity window. It ranges from overnight to a year, while offering the investor adequate liquidity all through. 


As such, money market mutual funds are a viable investment for investors with short-term wealth-creation goals. The instruments in these funds are of a high quality, and so the returns earned are fairly predictable. However, returns are still linked to the movements of the instruments in the fund.

What are the Different Types of Money Market Instruments?

Money market mutual funds are generally categorised under the following:


1. Repurchase Agreements or Repos


These are agreements made between a bank and the RBI for short-term loans. The agreement necessitates repurchasing the same security at a predetermined rate in the future.


2. Treasury Bills


These are debt instruments issued by the government and are considered the safest among the money market instruments. The government issues these securities to raise funds for up to 365 days. Considering the virtually risk-free nature of these bills, the returns aren’t as high as with other instruments. 


3. Certificate of Deposit (CD)


These are agreements the bank issues to a depositor, without the option of premature withdrawal. In this case, the bank agrees to pay interest at a predetermined rate. These instruments are issued at a discount, below par value.


4. Commercial Papers (CPs)


Commercial papers are also referred to as promissory notes. These are short-term, unsecured debt instruments that large corporations and financial institutions issue. Their fixed maturity doesn’t exceed 270 days.

Who Can Invest in Money Market Mutual Funds?

Anyone can invest in a money market mutual fund, and the benefit of doing so is that you can diversify your portfolio with short-term debt instruments. 


So, these funds are a viable choice for investors who: 

  • Want to inject stability into their portfolio and minimise exposure to market risks

  • Want to build on their low-risk appetite by choosing instruments with a better potential to generate returns 

  • Want to generate safe and reliable earnings in the short term 

  • Want to earn better returns on idle cash stashed away in a savings account

Some of the best money market mutual funds to invest in are those that have a proven track record over the past few years. Even in turbulent markets, the upside is that they provide a higher rate than your regular savings account.

What are the Risks of Investing in Money Market Mutual Funds?

Every investment instrument comes with a set of risks. Money market mutual funds are no different. Familiarising yourself with the risks can help you better plan your investment and ensure that it suits your appetite. 


1. Low Returns


Money market mutual funds provide lower interest earnings than other high-yielding market-linked securities. As such, the earnings will not be as high as an equities-focused mutual fund that is performing adequately in the same period. 


2. Inflation Risk


Depending on the inflation rate and how much it rises during the year, it is possible to generate negative returns. In such cases, your earnings aren’t adjusted for inflation, and some erosion of value is likely. 


3. Unsuitable for Long-term Investing


Since most of the instruments are traded in the money markets in the short-term, these funds aren’t suited for a longer horizon. For investors with medium to long-term goals, money market mutual funds will do little to generate the desired returns.  


With a better understanding of money market mutual funds, you are now equipped to invest in a more targeted manner. Considering the risks involved with such instruments, invest only if you have the right appetite for it. In situations where you are looking for more stable or long-term options, visit Bajaj Markets.


On the platform, you can invest in money market funds, bonds, FDs, or any other vehicle, based on your goals. Best of all, the process to invest is quick, simple, safe, and 100% digital. You don’t have to worry about delays and can take advantage of opportunities as they arise.

FAQs on Money Market Mutual Funds

What do money market mutual funds mean?

The money market refers to the financial market wherein traders and institutions deal or trade debt instruments with a short maturity window. These are usually cash or cash equivalents.

Are money market mutual funds safe to invest in?

How can I determine the NAV for a market money mutual fund?

Who can invest in money market mutual funds?


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