What are money market funds?

Money market funds (MMFs) are open-ended mutual funds that invest in short-term, relatively low-risk/low-to-moderate risk, and highly liquid securities. These funds primarily focus on mitigating risks while providing a potentially reasonable return, making them a suitable choice among investors seeking relative stability and liquidity.

Money market funds operate on the principle of pooling funds from various investors and investing them in a diversified portfolio of money market instruments. Individuals and institutions invest their money in a money market fund by purchasing units. These funds can also assist in diversifying an investor's portfolio.

Types of money market instruments

Money market funds typically invest in a range of money market instruments, which are short-term debt securities with maturities usually ranging up to one year.

Here are some common types of money market instruments:

Treasury bills (T-Bills)

These are short-term government securities with maturities ranging from 91 days to 364 days. T-Bills are considered one of the relatively stable investments as they are backed by the government's creditworthiness.

Commercial paper (CP)

Commercial paper is an unsecured, short-term debt instrument issued by corporations to raise funds for their working capital needs. It typically has maturities of 7 days to 1 year.

Certificate of deposit (CD)

CDs are time deposits offered by banks and financial institutions. They have fixed maturities and typically offer reasonable interest rates.

Repurchase agreements (Repos)

In a repo transaction, an MMF purchases securities from another party with an agreement to sell them back at a specified date and price. It is a short-term collateralised lending/borrowing arrangement.

Commercial bills

Commercial bills are short-term, negotiable debt instruments used by businesses to finance their working capital requirements.

Who should invest in money market funds

Individuals with a short-term investment horizon of upto one year and a need for high liquidity may consider investing in money market funds.

Furthermore, investors with a low appetite for risk and who seek reasonable returns than traditional investment options such as fixed deposits can place their investable funds in money market funds. These schemes provide a relatively better return potential in the short term.

However, if you have a long-term investment horizon, money market mutual funds may not be suitable for your objectives. Instead, you should consider investing in dynamic bond funds or balanced advantage funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.