A money market mutual fund is an open-ended debt scheme, where the fund manager invests in money market instruments like treasury bills and commercial papers which are highly liquid and have short-term maturities. Such papers are generally issued by the RBI and banks. These funds have a maturity period of up to 1 year.
Let’s take a closer look at these funds and understand them better.
What are the key features of money market mutual funds?
- Offers high liquidity - The ease at which an asset can be converted into cash/cash equivalent indicates its liquidity. Money market funds invest in short term securities and offer high liquidity. They are thus ideal for near term goals.
- Relatively low risk - Since these funds invest in short-term instruments, the interest rate risk is on the lower side. Further, money market instruments are typically backed by strong credit ratings, which reduces the credit risk.
- Comparatively more stable - Owing to the short-term duration, the volatility in the case of money market instruments is largely on the lower side. These funds can thus add stability to an investment portfolio.
When does investing in money market mutual funds make sense?
- Deploying surplus funds - There may be instances where an investor having surplus money is not sure where to deploy such funds. Rather than keeping them idle, it is advisable to invest in money market mutual funds.
- Creating an emergency fund - Liquidity is of utmost importance in the case of an emergency fund. Money market mutual funds offer the required liquidity and should thus be considered for parking emergency corpus.
- An alternative short term avenue - These funds are also recommended as a substitute to investing in fixed deposits and saving bank accounts for their ability to generate comparatively higher returns.
Conclusion
Money market mutual funds can effectively address liquidity and emergency funding needs. These funds suit all investor categories with short term goals.
Disclaimer: An Investor Education Initiative by Mirae Asset Mutual Fund
For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge center section available on the website of Mirae Asset Mutual Fund
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
