Things to consider when selecting a money market fund

In the world of investing, seeking out a reliable and secure avenue to grow your money isn’t always easy. However, more and more investors, nowadays, are increasingly turning to money market funds as a relatively stable and accessible option. These funds offer a balance of relative stability and liquidity, making them an attractive choice for all kinds of investors.
However, before jumping into the world of money market funds, it's crucial to understand their nature, workings, advantages, disadvantages, along with when and how to invest in them. In this article, we will discuss all the above aspects and check out the features of Bajaj Finserv Money Market Fund.

• Table of contents

1. What is a money market fund?
2. How does a money market fund work?
3. Advantages and disadvantages of money market funds
4. Bajaj Finserv Money Market Fund
5. When to invest in a money market fund?
6. How to invest in a money market fund?

What is a money market fund?

A money market fund is a type of mutual fund that primarily invests in low-risk, short-term debt securities such as treasury bills, certificates of deposit, commercial paper, and other highly liquid instruments. These funds are managed by professional fund managers and are designed to provide investors with a relatively stable place to park their cash. The returns from money market funds, while modest, generally exceed those from traditional savings accounts. However, while returns of savings account tend to be fixed, returns from money market funds are subject to market risk.

How does a money market fund work?

Money market funds work by pooling funds from multiple investors to create a diversified portfolio of short-term debt securities. The interest earned from the underlying investments is distributed among the investors in the form of Income Distribution cum Withdrawal (IDCW). The securities held by money market funds typically have maturities of one year or less, which helps to mitigate the risk associated with interest rate fluctuations.

Advantages and disadvantages of money market funds

Advantages:

• Money market funds are known for their relative stability, as they invest in low-risk securities with short maturities.
• Money market funds offer high liquidity, meaning you can easily convert your units into cash whenever needed by redeeming your investments.
• With money market funds, you benefit from the expertise of professional fund managers who monitor the portfolio on your behalf.
• While money market fund returns are typically modest, they usually tend to outperform traditional savings accounts. However, while returns of savings account tend to be fixed, returns from money market funds are subject to market risk.

Disadvantages:

• The conservative nature of money market funds means that their returns are relatively low compared to riskier investments like stocks or bonds.
• Money market funds may struggle to keep up with inflation.

Bajaj Finserv Money Market Fund

Bajaj Finserv AMC has launched the Bajaj Finserv Money Market Fund which is suitable for investors who are seeking a reasonable return over the short term with low risk and high liquidity. However, it is advisable that investors should consult a financial advisor if in doubt about any financial product

When to invest in a money market fund?

The decision to invest in a money market fund depends on your financial objectives, risk tolerance, and time horizon. Here are some scenarios in which a money market fund might be a suitable investment:

• Building an emergency fund is a vital aspect of financial planning. Money market funds offer a comparatively stable and liquid option to park your emergency savings.
• If you have specific short-term financial goals, such as saving for a vacation, a down payment on a house, or purchasing a car, a money market fund can help mitigate impact on your invested capital.
• During periods of economic uncertainty or stock market volatility, investors often seek refuge in money market funds.
• Retirees or investors seeking a relatively stable source of income can allocate a portion of their portfolio to money market funds.

How to invest in a money market fund?

Investing in a money market fund is a straightforward process, and there are several ways to go about it:
Employer-sponsored retirement plans:
Some retirement plans offer money market funds as one of the investment options. You can allocate a portion of your retirement savings to the fund within the plan. Through distributors – You can invest in money market funds with the help of mutual fund distributors. They also evaluate the investor’s risk tolerance levels and financial goals to recommend a suitable investment plan. Brokerage accounts: If you have a brokerage account, you can buy units of money market funds through the platform.
Systematic investment plans:
Some fund providers allow you to set up systematic investment plans, where a fixed amount is deducted from your bank account at regular intervals. Through a fund house: Many mutual fund companies offer money market funds. You can open an account directly with them and invest in the fund of your choice.

Conclusion

By understanding the nature and workings of money market funds, as well as their advantages and disadvantages, investors can make informed decisions based on their financial goals and risk tolerance. Whether you are saving for emergencies, short-term goals, or seeking relative stability during uncertain times, a well-chosen money market fund can play a valuable role in your investment portfolio.

FAQs:

What are the main characteristics of a money market fund?

Money market funds invest in short-term debt securities like treasury bills and commercial paper etc. They offer low-risk, high liquidity, and are suitable for parking surplus funds

What factors should investors assess before choosing a money market fund?

Investors should consider the credit quality of the underlying securities, liquidity levels, relative stability, and ease of redemption.

How does the fund's maturity and duration impact investment decisions?

Longer maturity or duration in money market funds may lead to slightly better return potential but also may entail higher interest rate risk. Shorter-term funds are more resilient to interest rate fluctuations.

What is the significance of fund management expertise when choosing a scheme?

Experienced fund managers can make informed decisions, which can influence the fund's performance.

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.