Investors with a low-risk tolerance are always on the hunt for investments that will provide them with high returns while preserving the liquidity of their cash. Several debt funds have been created with this consideration in mind. Additionally, most investors compare the returns on their debt fund investments to bank deposits. When it comes to investing in short-term debt, money market funds have been favoured by such investors. Here, we will examine and discuss the many sorts of money market funds in India, as well as their benefits and more.
What are Money Market Funds?
Money Market Funds are debt funds that lend up to one year to corporations. By adjusting the period of the loan, these funds are meant to enable the fund management to earn higher returns while keeping risk under control. Typically, longer loan terms result in larger returns.
Key takeaway:
- Ideal for a time horizon of at least three to six months
- Low loss probability if invested for six months or longer
- These programs typically offer higher yields than comparable-duration Bank Fixed Deposits.
Types of Money Market Instruments
Money market funds invest in money market instruments, as discussed previously. These are cash instruments or cash-equivalent instruments that can mature overnight or within a year. The following instruments are traded in India’s money market:
- Certificate of Deposit
A certificate of deposit (CD) is a financial instrument provided by commercial banks to their clients. A CD allows a person to deposit a sum of money with a bank for a specified length of time at a predetermined interest rate. The depositor cannot withdraw the principal and relevant interest until the maturity date. Unlike fixed deposits (FD), certificates of deposit (CD) are negotiable. The Reserve Bank of India controls its interest rates (RBI).
- Treasury Bill
Treasury bills are government-issued investment instruments. Therefore, they are regarded as risk-free and secure. Treasury bills with maturities ranging from 91 to 365 days are issued. Treasury bills offer poor returns, arguably the lowest among all money market assets, given their low risk.
- Repurchase Agreements
This is an arrangement between a commercial bank and the Reserve Bank of India (RBI) or between two commercial banks that facilitates short-term borrowing. Under these conditions, debt instruments are traded at a predetermined price and acquired at a higher price at a later date, with the repo rate representing the difference.
- Commercial paper
Commercial papers are unsecured promissory notes issued by reputable financial entities. They are issued at a discount to the investor and redeemed at face value upon maturity. CPs, which are regarded as high-return investments, typically mature after 270 days.
List of Best Money Market Mutual Funds (as per 1-year return)
| Scheme | 1-Year Return | AUM (INR)(Cr) |
| Nippon India Money Market Fund | 4.43% | 10,141.20 |
| Tata Money Market Fund | 4.36% | 7,317.82 |
| UTI Money Market Fund | 4.32% | 7,448.83 |
| PGIM India Money Market Fund | 4.30% | 54.06 |
| Aditya Birla Sun Life Money Manager Fund | 4.29% | 13,825.00 |
| Kotak Money Market Fund | 4.28% | 13,641.22 |
Source: AMFI (data as of 19/10/2022)
Who Should Invest In Money Market Funds?
These schemes are perfect for investors with reduced risk tolerance and an investment horizon of up to one year because they invest in money market securities. Investing in these funds typically offers investors with idle funds sitting in their savings accounts better returns. It is significant to note that investors with short-term cash surpluses that they won’t need immediately are advised to use this money.
Factors To Consider Before Investing In Money Market Funds in India
Investing in money market funds raises two key issues. First off, although these funds typically invest in short-term assets with a low likelihood of default, credit risk is still present. Recently, there have been a few examples of highly rated commercial paper being significantly downgraded because the issuing company couldn’t satisfy its interest obligations. A money market fund’s value is expected to decline significantly if it holds a sizable portion of downgraded or in default debt paper.
Second, although money market funds seek to produce steady and consistent income, there is no assurance that this goal will be met. When market interest rates change, fund values will move up and down. The fund could have a yield that is significantly lower than its competitors if the fund management consistently predicts interest rates incorrectly. Investors must therefore pick money market funds with a track record of constant excellence and sustainable returns.
FAQs
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How quickly can you redeem money market funds?
You can redeem it, and the amount will be deposited into your bank account within two working days, just as with other mutual funds.
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