What are money market funds?
Money market funds are short-term funds that invest in money market debt securities having a maturity of up to one year, including treasury bills, certificates of deposit, commercial papers, and others.
Who should invest in them?
Money market funds are seen to be the best option for individuals with minimal risk tolerance and short-term investment goals. You may consider these funds if you have extra cash on hand and a one-year or less time horizon for investing. These investments might potentially provide slightly better returns than a typical savings account.
Are these funds safe?
Money market funds are subject to all the same risks as other debt funds, including interest rate and credit risk. However, because they invest in relatively short-term debt securities, they are less risky than other debt mutual funds.
How much returns can you expect?
The returns on money market funds are often larger than those on savings accounts. They occasionally could, nevertheless, provide poorer returns. For instance, according to Value Research, the category of money market funds has returned 3.35% over the past year. These funds offer higher returns than medium-term, long-term, and dynamic bond funds. These funds' returns, however, are lower than those of liquid, low term, and credit risk funds. Most debt mutual funds deliver subpar returns in an environment of rising interest rates.
How are money market funds taxed?
Similar to other debt mutual fund programmes, these funds are taxed. Gains are classified as short-term capital gains if you keep your investments for less than three years. They are included in income and taxed in accordance with the investor's appropriate income tax bracket. Long-term capital gains are taxed at 20% with an indexation advantage if assets are held for more than three years.
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