Money market funds are a type of mutual fund that invests in low-risk, short-term debt like government securities and commercial paper. These investments typically mature within a year, minimising the impact of interest rate changes and making them a good option for parking your cash.
Various money market fund types offer several advantages. First, they are known for their stable share price due to the short maturities. Second, they are highly liquid, allowing you to easily access your cash whenever needed. Finally, depending on the specific fund, the income generated may be tax-exempt, further boosting your returns.
What is a money market?
The money market refers to a segment of the financial market where short-term borrowing and lending of funds take place. It deals with instruments that have a maturity period of up to one year. The money market serves as a crucial component of the overall financial system, facilitating liquidity management for institutions and offering a platform for governments, corporations, and financial institutions to meet their short-term funding needs.
What are money market mutual funds?
Money Market Mutual Funds, often referred to as money market funds, are a type of mutual fund that primarily invests in short-term debt securities and money market instruments. These instruments are highly liquid, low-risk financial instruments that mature within a short period, typically less than a year. Money market funds provide investors with an opportunity to earn slightly higher returns than traditional savings accounts or fixed deposits, while still maintaining a high level of liquidity and safety.
How do money market funds work?
Money market funds pool money from multiple investors and invest in a diversified portfolio of money market instruments. These funds aim to maintain stability in their net asset value (NAV) and provide investors with a source of income through interest earned on their investments. The returns from money market funds are typically higher than traditional savings accounts, making them an attractive option for parking surplus funds temporarily.
What are the types of money market funds?
Some of the common types of money market funds are:
- Treasury Bills (T-Bills): T-Bills are short-term government securities issued to raise funds and typically have maturities ranging from a few days to one year, offering a secure investment option.
- Commercial Papers (CPs): CPs are unsecured, short-term debt instruments issued by corporations to meet their immediate funding needs, often providing higher yields to investors.
- Certificate of Deposits (CDs): CDs are time deposits offered by banks and financial institutions with fixed terms and interest rates, making them a safe and predictable investment choice.
- Repurchase Agreements (Repos): Repos involve the sale of securities with an agreement to repurchase them at a specified future date, serving as a short-term collateralized borrowing mechanism in financial markets.
