What is a money market fund?
In order to provide significant returns, money market mutual funds invest in treasury bills, commercial papers, and certificates of deposit. These short-term debt funds have an approximate one-year maturity period. Money market funds, also known as money market mutual funds, have a high level of liquidity and tend to invest primarily in fixed income assets.
Money market instruments are the securities that money market funds invest in. These offer great liquidity and security thanks to the solid credit ratings of their issuers. These funds are best suited to the requirements of risk-averse investors looking for quick profits. They provide relatively predictable returns because they are high-quality, risk-free investments.
- Types of money market instruments
Money market funds invest in money market products, as was already indicated. These products can mature in as little as one year and are cash or cash-equivalent instruments. Here are some items exchanged in the Indian money market:
- Certificate of deposit
A certificate of deposit (CD) is a financial product that scheduled commercial banks make available to its clients. A CD allows someone to place money in the bank for a certain amount of time at a predetermined rate of interest. The depositor must wait until the investment has matured before taking any appropriate interest. A CD is negotiable in contrast to fixed deposits (FDs). The Reserve Bank of India controls its interest rates (RBI).
- Treasury bill
The government issues Treasury bills as a kind of investment. They are therefore regarded as risk-free and secure. Treasury notes can be purchased for maturities of 91 days to 365 days. Treasury notes have among of the lowest returns among all money market securities due to their minimal risk.
- Repurchase agreements
This is a reference to an arrangement that makes short-term loans possible between a commercial bank and the RBI, or between two commercial banks. In these, debt instruments are sold at a certain price and then bought at a later, higher price; the repo rate is the difference between the two prices.
- Commercial paper
Unsecured promissory notes known as "commercial papers" are issued by financial institutions with strong credit ratings. When they mature, they are redeemed at face value after being issued to the investor at a reduced price. Investments in CPs are thought to have a high rate of return and they typically mature after 270 days.
- Taxation
Gains from money market fund investments are taxed similarly to debt fund gains. Taxes on capital gains are due from them. Money market fund units are subject to short-term capital gains tax based on the applicable income tax bracket if held for less than three years. A 20% indexation long-term capital gains tax is applied on assets after three years.
Conclusion
These funds' net asset values (NAV) change as interest rates are changed. Additionally, there is an exit load that must be paid when money is taken out of money market mutual funds. These funds are subject to the same interest rate and credit risks as debt funds. Investors might profit by allocating a portion of their investing capital to money market funds while keeping in mind all these considerations.
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