Mutual funds are not just about investing in debt, equity or a mix of the two. Through these investment vehicles, you can also invest in liquid securities like money market instruments. If you have a low tolerance for risk but also want exposure to mutual funds, money market funds may be a suitable choice for your portfolio.
In this article, we delve into what these mutual funds are and how they help you tap into the advantages of money market instruments.
What is a money market fund?
A money market fund is a type of mutual fund that focuses on investing predominantly in money market instruments. These instruments are highly liquid short-term debt securities. Some examples of such instruments include Treasury Bills (T-Bills), Commercial Papers (CPs), Certificates of Deposit (CDs) and other such securities. The maturities of such instruments are usually up to one year.
You can invest in such mutual funds either through an Asset Management Company (AMC) or through your preferred stock broker. If you’re not sure whether such funds are suitable for you, check out the top advantages of investing in money market funds before making a choice. Read more about, What is a money market fund.
Key advantages of investing in money market funds?
Money market funds offer a wide range of benefits for investors. Some of these advantages are unique to this type of mutual fund. Here is an overview of the primary benefits of investing in money market funds.
1. Liquidity
One of the main benefits of these funds is the liquidity they offer. This is because the securities that make up the portfolios of these funds have a very short-term maturity period. So, you can expect fairly high liquidity when you choose money market funds.
2. Safety
Another advantage of money market funds is that they are relatively safer than market-linked investment options like equity mutual funds. So, if you are a conservative investor or if you want a low-risk investment avenue, you can consider these mutual funds.
3. Better yields
The interest rate offered by money market instruments is often slightly higher than the rates on other cash-based accounts like savings accounts. Furthermore, the yield may also sometimes be higher than the FD rates offered by some banks.
4. Short-term outlook
If you have a lump sum amount that you want to safely park temporarily, money market funds can be the ideal choice. They focus on capital preservation and also have a short-term outlook, so you can access your capital easily when needed.
5. Stable investments
These funds also help you leverage another key advantage of money market instruments — which is their low volatility. The values of these mutual fund units are relatively stable when compared with the units of market-linked funds.
High-return mutual fund categories for smart investing
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Should you invest in money market funds?
Now that you know the main advantages of money market funds, you may be wondering if these schemes are suitable for you. Ideally, you could consider investing in money market funds if:
- You are looking for a safe place to park your money temporarily
- You want a higher yield than the typical rate of interest offered by a savings account
- You prioritise liquidity and want to access your money at short notice
- You prefer investments with low exposure to market risks
- You want an investment option that offers stable returns for your short-term goals
Things to keep in mind while investing in money market funds
If you decide to invest in money market funds to capitalise on the benefits listed above, you must be aware of some crucial aspects, such as the following:
1. Money market fund risks
Money market funds may not be exposed to equity market risks, but they do carry certain other risks. For instance, these funds are exposed to inflation risk, where the value of money market instruments may drop due to inflation. They are also vulnerable to interest rate risks because the yields depend on the interest rate.
2. Expense ratio
Another aspect to look into before investing in money market funds is their expense ratios. This includes the various fees and charges that the mutual fund house levies to meet the operational and management costs of the fund. By accounting for the expense ratio, you can assess the true net returns from your investments.
3. Tax implications
With effect from March 31, 2023, profits from money market funds are taxed as per the applicable income tax slab rate — irrespective of the holding period. So, you cannot expect any additional tax savings from these investments.
Conclusion
The bottom line is that money market funds can be beneficial for you if you need to meet specific goals like liquidity, have a short-term outlook and prefer safe investments. If you are looking for an easy way to tap into the advantages of money market instruments, the Bajaj Finserv Mutual Funds Platform can help you out.
On this platform, you can check out over 1,000 mutual fund schemes, including money market funds. You can even compare mutual funds to find the schemes that best align with your goals, risk tolerance, investment horizon and more. Thereafter, you can start a SIP investment or make a lump sum investment in the money market fund of your choice directly online.
