What are Money Market Mutual Funds & Who Should Invest?

Money market funds are a subcategory of debt mutual funds. These schemes are suitable for risk-averse investors who are seeking stable returns and liquidity. That said, before investing in such schemes, individuals should know about the benefits and returns offered by such funds.

Here, we have shared the details to help you make an informed decision regarding your investment. But first things first, let’s understand what are money market funds.

A Money market fund allocates its investment corpus to short-term, fixed-income securities that are highly liquid. The average maturity period of the underlying financial instruments is not more than 1 year. Accordingly, investments in money market funds are associated with low interest rate risk.

The portfolio of such mutual fund schemes may comprise the following types of financial securities:

• Commercial papers (CP)
• Certificate of deposit (CD)
• Treasury Bills (T-bills)
• Banker’s Acceptance
• Commercial bills
• Repurchase agreements (Repo)
• Call and note money

The two main objectives of money market mutual funds in India are:

• Providing risk-averse investors with stable returns
• Catering to the liquidity needs of individuals

1. Understanding Maturity Period

The volatility of a debt fund and the level of interest rate risk associated with the investment have a direct relationship with the Macaulay duration of the portfolio. This means that the longer the duration, the greater the extent of volatility and interest rate risk.

Since a money market fund invests in financial instruments having a maturity period of not more than 1 year, it is subject to low volatility.

2. Sources of income

Money market funds earn income via interest and capital appreciation. The former refers to the interest payments received from the underlying securities. There’s scope for offering capital gains as well. Fund managers of these mutual fund schemes actively buy and sell fixed-income securities to take advantage of the changing interest rates in the market. When interest rates go down, such schemes increase their exposure to money market instruments in India with a longer maturity period, leading to an increase in the fund value.

Similarly, when interest rates increase, these funds invest more in money market securities with a shorter maturity period. This leads to the reduction of capital losses. Note that since the maturity period of the portfolio constituents is not more than 1 year, there isn’t much scope for earning capital gains.

There are two ways to invest in such funds. One can invest in money market funds through any one of the following two investment routes:

• Systematic investment plan (SIP)
• Lumpsum

But before choosing the mode of investment, investors must opt for a direct or regular plan. Let’s find out what they are.

• Direct plan: To opt for a direct plan in money market funds or any other type of mutual fund scheme, individuals need to invest directly via the fund house. Alternatively, they can invest via specific mobile-based applications/online platforms.
• Regular plan: Individuals need to invest in a fund via an intermediary (brokers/ distributors) in case they wish to opt for a regular plan.

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