Money market funds are a type of mutual fund investing that focuses on short-term debt securities with high credit ratings. These funds invest in government securities, certificates of deposit (CDs), commercial paper, treasury bills, and other short-term debt instruments. The primary objective of money market funds is to generate an income stream that is consistent with the preservation of capital.
There are mainly three types of money market funds classified based on the maturity period of the instruments held in their portfolios. These are:
1. Liquid Funds:
Liquid funds invest in debt securities with a maturity period of up to 91 days. These funds are considered to be the safest among the three categories. The investor can expect to earn returns of about 6-7% per annum. The risk associated with liquid funds is the credit risk, which arises due to the default of the issuer of the debt security.
2. Ultra-Short Duration Funds:
Ultra-Short Duration Funds invest in debt securities with a maturity period of up to one year. These funds invest in a mix of certificates of deposit, commercial paper, and treasury bills with varying maturities. The returns of ultra-short duration funds are 7-9% per annum. These funds hold a moderate risk level, with the credit risk being the primary risk.
3. Low Duration Funds:
Low Duration Funds invest in debt securities with a maturity period of up to three years. These funds hold a moderate risk level higher than liquid funds and ultra-short duration funds but still present a lower risk profile than other mutual funds investing in the equity market. Low-duration funds provide returns in the range of 8-10% per annum, depending on the instrument held by them.
It is important to keep in mind that the returns of money market funds are closely linked to the interest rates prevalent in the market. The returns are low during periods of low interest rates and may be higher in times of high interest rates.
The investor must evaluate the pros and cons of trading in the Indian financial market and gauge the risk factors involved, including credit risk, reinvestment risk, and interest rate risk. The past performance of money market funds does not guarantee future returns. It is also necessary to assess the fund managers’ expertise, management fees, exit loads, and tax implications before investing in these funds.
To summarize, money market funds offer a low-risk investment option for investors seeking regular income and capital preservation. These funds provide a good portfolio diversification option for investors with high-risk equity mutual fund investments. However, it is essential to carry out due diligence and assess all the pros and cons of investing in the Indian financial market before investing in any mutual funds.
In conclusion, money market funds are an excellent option for investors seeking low-risk investment options and regular income. The three categories of money market funds-liquid funds, ultra-short duration funds, and low duration funds- provide investors with a range of options to choose from based on their investment objectives. However, it is essential to evaluate the fund’s performance, management expenses, tax implications, and risk factors before making an investment. The investor must also weigh all the pros and cons of trading in the Indian financial market before investing in any mutual funds.
