Money Market Mutual Funds & Its Significance

By | 08/04/2019

Money Market Mutual Funds & Its Significance

In India the majority of people like to grow their savings or excess money in more safe and risk-free investments like fixed deposits or recurring deposits. So, increasing awareness of the stock market has now made people more open to investing in these options. Basically, money market mutual funds are a safe bet for people who are interested in the stock market and want to invest without worrying about the risks that are typically involved in the stock market.

These funds give a perfect combination of factors such as liquidity when you need it, decent returns, and high levels of safety. You can perfectly park your savings safely and use it when needed for any planned or unplanned events, such as vacations or hospital emergencies. It can be a great option to balance out your portfolio with safe instruments that protect your capital, especially if the rest of your portfolio is filled with high-risk mutual funds. You can learn more details about money market mutual funds in this article presented by India’s First Free Online Financial Advisory MoneyMindz.

What Is A Money Market Mutual Fund?

These are open-ended schemes with a maturity period that is typically less than a year. Such investments are made in instruments that are highly liquid, low in risk, safe, and high in quality, such as repurchase agreements, certificate of deposits, commercial paper, treasury bills, etc. Well the interest rates for such funds will be floating, fixed, or changeable.

You will also find short-term money market instruments that have a maturity period as short as 3 months. It is perfect for emergency funds where you can park your money while making it grow even if it is for a period of 1-3 months. This can be ideal for those situations where you foresee the need for money in the near future and want it to grow just a little bit more.

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Whether it’s a family vacation, wedding, it is to pay for your child’s education abroad or a surgery/treatment/cosmetic procedure that you have scheduled in 3 months, you can be sure that your money will be in safe hands and be returned to you a lot more than what you had put in. The ones who are on the verge of retiring can also transfer funds to liquid funds that are less risky from their equity schemes using the Systematic Transfer Plan (STP) feature that is available in many mutual fund schemes.

Different Kinds of Money Market Mutual Funds?

There are various types of assets that money market mutual funds invest in. Basically, there are two types: institutional money market mutual funds and retail money market mutual funds. Institutional money market mutual fund is held by the government, businesses, and institutional investors. The second one consists of tax-free bonds, treasury bills, and short-term debts. Such funds are typically gilt funds, debt funds, and fixed maturity plans (FMPs).

Gift Funds

These funds invest in government securities, bonds, and loans of the state government and central government loans which are medium to long term. You will not find risk at all to the investment and returns are assured and decent. This helps in diversification of portfolios. A fund manager of the gilt fund subscribes to these government securities which have a specific tenure. The gilt fund receives money on the return of the government securities when they mature. Also the returns from a gilt fund are dependent on the interest rates. The perfect time to invest in gilt funds would be when the interest rates are falling. It can generate up to 12% in returns.

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Debt Funds:

These funds are for earning capital appreciation with interest income. The interest and duration are pre-decided. One more name for them is ‘fixed income securities’ because you know beforehand what and how much you are getting out of it. Investments are made in different types of securities, so there is diversification, which gives good returns, but there is no guarantee of returns even if they are within a range that is predictable. So, the investments are made in securities that have good credit ratings. The manager of a debt fund will only invest in those securities which have high credit scores and no defaults in payments.

If the interest rates are falling, the manager will most likely invest in long-term securities and vice versa. Therefore, it is a good deal for those investors who are looking not just for short-term investments, but more medium-term investments too. So, the range could be anywhere from 3 months to 5 years. There will be investments which offer a Monthly Income Plan as well, which is ideal for those who want a regular income.

Fixed Maturity Plans (FMPs):

Such fixed maturity plans are mutual fund schemes that are close-ended with a pre-defined tenure period that can be anywhere from 30 days to 5 years in duration. So, investments are made in bonds, certificates of deposits, government securities, or company debt, which are fixed income instruments.

They won’t have an equity component unless it is a plan that has opted for a limited equity component. It is ideal for people who want safe, regular, and flexible returns. This is good as a tax saving instrument for those in the higher-income tax bracket. Even though, the interest rates on FMPs are similar to that of fixed deposits, they attract lower taxes because of the indexation benefit on long-term capital gains.

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