Money Market Fund
Investors that have a reduced risk tolerance are always searching for investing opportunities that will provide them with profitable returns while also preserving their funds' liquidity. Numerous debt funds were created with this consideration in mind. Most investors also frequently contrast the returns on their bank deposits with those on their investments in debt funds. Money Market Funds have always been the favoured choice for these investors when it comes to short-term debt investments. Here, we'll examine and discuss the many money market fund kinds available in India, as well as their advantages and other things.
What are Money Market Funds?
Money Market Funds are investments in short-term debt. They make investments in various money market instruments and work to maintain high levels of liquidity while providing strong returns for a period of up to one year. A money market fund typically matures after one year.
Types of Money Market Instruments
Cash and assets with a cash equivalent are traded on the money market, which is an exchange. The maturities of the securities traded on the money markets range from overnight to one year. Here are some essential financial instruments used in India:
Treasury Bills or T-Bills
Treasury bills are issued by the Indian government to generate money for a maximum of 365 days. These are thought to be quite safe because the government issues them. Lesser risks, however, also equate to lower rewards, which is also true for treasury notes. T-bill returns are lower than those on other money market securities.
Certificate of Deposit or CD
A CD is a type of term deposit issued by listed commercial banks that does not allow for early redemption. A CD and FD are fundamentally different from one another since CDs are freely negotiable.
Repurchase Agreements or Repos
In order to enable short-term lending, a bank and the RBI enter into a buyback agreement. Additionally, it may be done between two banks.
Commercial Paper or CP
Commercial papers, which are unsecured, short-term promissory notes, can be issued by businesses and financial institutions with strong credit ratings. It enables these organisations to spread out the sources of their short-term borrowing. CPs are often issued at a reduced price, and they are redeemed at their face value. The difference is paid to the investor.
How do Money Market Funds work?
In order to provide strong returns (interest income) and minimise NAV swings, money market funds invest in money market instruments.
Here are the top money market funds in India, as determined by their performance over the last five years:
Remember that this is only a list of top-performing money market funds in India and not a recommendation. Before you invest, make sure you stick to your investment strategy.
Who should invest in a Money Market Fund?
These programmes are perfect for individuals with reduced risk tolerance and an investment horizon of up to one year since they invest in money market securities. Investing in these funds often offers investors with idle monies sitting in their savings accounts higher returns. It is significant to highlight that investors with short-term cash surpluses that they won't need immediately are advised to use these money.
Factors to consider before investing in Money Market Funds in India
Before investing in money market funds in India, keep the following points in mind:
1. Risks and Returns
Money Market Funds are debt funds, thus they are subject to all the hazards associated with those types of investments, including interest rate and credit risk. In order to boost returns, the fund management may also invest in securities with a somewhat greater risk level. Money market funds typically provide higher returns than a standard savings account. As the interest rate regime shifts, so does the Net Asset Value, or NAV, of these funds.
2. Expense Ratio
The expenditure ratio is crucial in deciding your money market fund profits because the rewards are not very high.
The expense ratio is a minimal portion of the fund's total assets that the fund house charges for fund management services.
To optimise your profits, you should ideally seek for funds with lower expense ratios.
3. Invest according to your Investment Plan
Money market funds are often advised for investors with a 90–365 day investment horizon. These plans can assist you in diversifying your portfolio and assisting in the liquid investment of extra funds. Make sure to invest in accordance with your investing strategy.
You want to invest. Create an account with Groww to begin free direct mutual fund investing.
Taxation
The following tax regulations apply to money market funds:
Capital Gains Tax
The capital gains you make are known as short-term capital gains, or STCG, if you keep the scheme's units for up to three years. Your taxable income is increased by STCG and taxed in accordance with the relevant income tax bracket.
Long-term capital gains, or LTCG, are the capital gains you make when you own scheme units for more than three years. With advantages for indexation, LTCG is taxed at 20%.
Related Blogs:- Everything you wanted to know about money market funds | How Do Money Market Funds in India Work