Money Market Funds: Risks and benefits

money market fund risk and benefits
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What are money market funds?

Money market funds are mutual fund schemes that invest in debt and money market instruments with a maturity period of up to 1 year. They may invest in short-term fixed-income instruments such as commercial papers (cp), certificates of deposit (cd), treasury bills and so on. Additionally, these funds are characterised by relatively low to moderate risk, a short investment horizon, and high liquidity.
Another point to note is that some funds may keep adjusting their lending duration to generate potentially higher returns while seeking to control the risk factor of the investment. Thus, an investment in money market funds is more desirable than keeping the same amount in a savings bank account since they typically offer better returns than bank interest rates in the same time horizon, but at a higher risk than savings account.

  • Table of contents:
  1. What are money market funds?
  2. Who should invest in money market funds?
  3. What are the benefits of investing in money market funds?
  4. What are the risks associated with money market funds?
  5. Why should you invest in Bajaj Finserv Money Market Fund?
  6. FAQ

What are money market funds?

Money market funds are mutual fund schemes that invest in debt and money market instruments with a maturity period of up to 1 year. They may invest in short-term fixed-income instruments such as commercial papers (cp), certificates of deposit (cd), treasury bills and so on. Additionally, these funds are characterised by relatively low to moderate risk, a short investment horizon, and high liquidity.
Another point to note is that some funds may keep adjusting their lending duration to generate potentially higher returns while seeking to control the risk factor of the investment. Thus, an investment in money market funds is more desirable than keeping the same amount in a savings bank account since they typically offer better returns than bank interest rates in the same time horizon, but at a higher risk than savings account.

Who should invest in money market funds?

You should invest in money market funds if:

  • You have a low-risk, low to moderate risk appetite.
  • You have a short-term investment horizon of up to 1 year.
  • You are looking for investment options with high liquidity and an easy redemption process.
  • You want to earn more than the interest offered in a savings bank account.
  • You want to diversify your investment portfolio and balance out the overall risk.
  • You are looking for a relatively low-cost fixed-income avenue of investment.

What are the benefits of investing in money market funds?

Before you learn about the money market fund investment risks, you must first look at the benefits of investing in money market funds:

  • High liquidity: Like many other debt funds, money market funds offer high liquidity. They invest in highly rated debt securities that are in high demand in the short-term.
  • Low volatility: Money market funds fall in the low to moderate risk investment category since they invest in highly rated debt instruments and have a short maturity period of up to 1 year. The low to moderate risk and high liquidity offered by money market funds makes them ideal investment option for most investors.
  • Returns: Since they invest in debt in money market instruments such as certificates of deposit (cd), treasury bills and so on, you can get relatively stable money market fund returns as compared to the fluctuating returns from equity funds.
  • Portfolio diversification: If you have put your money in aggressive investment instruments then money market funds can turn out to be a balancing factor in your portfolio.

What are the risks associated with money market funds?

Now that you know about the benefits, it is time you understand the money market fund investment risks as well. They are:

  • Inflation risk: Irrespective of how better your money market fund returns are as compared to bank interest rates; they mean nothing if inflation is higher. The loss of your purchasing power in such cases does not make money market funds a desirable instrument of investment.
  • Risk factor: Since most people compare the two, they fail to recognise that savings bank accounts are far more secure than money market funds. The risk factor associated with money market funds is low when compared with mutual funds, but high when compared with savings accounts and fixed deposits.

Why should you invest in Bajaj Finserv Money Market Fund?

Bajaj Finserv Money Market Fund can provide potentially better returns than traditional bank account deposits by investing in money market instruments. You can get started with as little as Rs. 1000. They offer a ‘low to moderate/moderate-risk, high-liquidity investment’ option to help investors earn relatively better returns. Moreover, there is no entry and exit load applicable on Bajaj Finserv Money Market Fund.
In conclusion, money market funds offer ‘low risk/low to moderate risk, high liquidity’ that make them a tool for portfolio diversification and a better alternative than keeping money in savings bank accounts. Anyone new to mutual funds can get started with debt funds like money market funds since the principal amount is not at high risk. Now that you know the money market funds’ risk and benefits, you are in a better position to decide if money market funds are suitable for you. However, it is always wise to consult a financial expert before making any investment decisions.

FAQs

What are the risks associated with money market funds?

Although money market funds are relatively low-risk, low to moderate risk, there is still a possibility of default by issuers of the underlying securities. Additionally, changes in interest rates can affect the fund's returns.

What are the benefits of investing in money market funds?

Money market funds offer high liquidity, allowing quick access to funds. They are considered relatively stable than many other investment options and are suitable for short-term cash management.

Are money market funds suitable for long-term investments?

Money market funds are designed for short-term investments. While they offer relative stability compared to long term debt funds, they may not provide substantial returns over an extended period due to their conservative investment approach. Long-term investors might consider other investment options for potential higher returns.

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.