Money market funds: How do they work?

If you are looking for a mutual fund scheme that provides potentially reasonable returns without compromising on liquidity, then a money market fund can cater to your financial needs. Here, we will take you through the workings of money market funds,

• Table of contents

1. Understanding money market funds
2. Types of money market instruments you must be aware of
3. Why you should be selecting money market fund?
4. Bajaj Finserv Money Market Fund

Understanding money market funds

Money market funds are a type of mutual fund that invests in short-term, low-risk, and highly liquid financial instruments. These funds aim to generate potentially stable returns while mitigating the impact on the invested capital. Middle-class investors tend to prefer money market funds because they offer a decent alternative to traditional savings accounts or fixed deposits.
Regulated by the Securities and Exchange Board of India (SEBI), money market funds can provide an avenue to invest in a diversified portfolio of money market instruments with a nominal entry threshold. This makes money market funds accessible to a broad range of investors.

Types of money market instruments you must be aware of

Money market funds invest in a variety of short-term instruments, each serving a specific purpose in the financial ecosystem. Some of the commonly utilized money market instruments include:
Treasury bills (T-bills): These are short-term debt instruments issued by the government to raise funds. T-Bills have maturities ranging from a few days to one year and are considered one of the safest investments, as they are backed by the government's creditworthiness.
Commercial papers (CPs): CPs are unsecured money market instruments issued by well-established corporations to meet their short-term funding requirements. They usually have maturities ranging from 15 days to one year, making them highly liquid.
Certificates of deposit (CDs): CDs are time deposits offered by banks and financial institutions with fixed maturity dates and specified interest rates. They are negotiable and can be sold in the secondary market before maturity.
Repurchase agreements (Repos): Repos are short-term agreements where one party sells securities to another with an aim to repurchase them at a specified date and price. They are commonly used for overnight borrowing and lending between banks and other financial institutions.

Why you should be selecting money market fund?

Relative Stability: Money market funds invest in low-risk instruments, such as T-bills and CPs, backed by the government or reputable corporations. This focus on relative stability ensures that the risk of capital erosion is minimized, making money market funds a relatively steady investment option.
Liquidity: One of the key advantages of money market funds is their high liquidity. Unlike traditional fixed deposits, investors can redeem their units at any time with/without any exit load, subject to certain conditions.
Stability and predictability: Money market funds aim to provide potentially stable and predictable returns over a short investment horizon. While the returns may not be as high as those of equity funds, the consistency and predictability of money market funds make them attractive to risk-averse investors.
Professional management: Just like other mutual funds, even money market funds are managed by experienced professionals who actively monitor the market conditions and adjust the fund's portfolio accordingly.
Diversification: Money market funds invest in a variety of instruments, spreading the risk across different issuers and maturities. This diversification reduces the impact of any negative event on a particular instrument.

Bajaj Finserv Money Market Fund

Bajaj Finserv AMC has launched the Bajaj Finserv Money Market Fund which is suitable for investors who are seeking:

• Income over the short term.
• Investment in money market instruments that seek to provide reasonable returns, commensurate with low risk while providing a high level of liquidity.

Conclusion:

For middle-class investors in India seeking liquidity, and relative stability while striving for modest returns, money market funds can prove to be a suitable investment avenue. These funds combine relative stability with professional management to generate relatively consistent returns. By investing in a diversified portfolio of short-term money market instruments, money market funds can empower middle-class investors to make the most of their hard-earned money without exposing themselves to undue risks.

FAQs:

What are money market funds?

Money market funds are a type of mutual fund that invests in short-term, highly liquid, and low-risk instruments such as treasury bills, commercial papers, and certificates of deposit.

Are money market funds a stable investment option?

Money market funds are considered relatively stable due to their conservative investments. However, they are not risk-free and may still be affected by market fluctuations and changes in interest rates.

How do money market funds differ from other mutual funds?

Money market funds focus on short-term, low-risk securities, making them ideal for investors seeking limited impact on capital, low volatility and liquidity. In contrast, other mutual funds may invest in stocks, bonds, or a combination of asset classes with varying degrees of risk and return potential.

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 an 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.