Can Money Market Funds Lend Stability in a Volatile Market?

When the market is volatile, investors often seek refuge in relatively stable and liquid assets to potentially mitigate risk. Money market funds can be a suitable option in such tumultuous periods, offering a combination of relative stability, liquidity, and modest return potential.

This article explores the significance of money market funds in volatile markets and their potential benefits for investors.

• Table of contents

1. Role of Money Market Funds in Volatile Markets
2. Potential benefits in volatile markets

Role of Money Market Funds in Volatile Markets

Stability

Money market funds can offer some relative stability amid market turbulence. These funds primarily invest in money market securities such as treasury bills, certificates of deposit, and commercial paper with a maturity of up to one year. Such funds have a relatively low credit risk and interest rate risk because of the high quality and short maturity of the underlying securities. Through such investments, money market funds strive to maintain a relatively stable Net Asset Value (NAV).

Liquidity

One of the key advantages of money market funds is their high liquidity. Investors can buy or sell units in these funds at any time and there are typically no redemption charges or exit loads. High liquidity is important during volatile market conditions as it gives investors swift access to their funds without significant costs or delays.

Risk

No investment is risk-free, but money market funds can be suitable for conservative investors as they entail relatively low risk. By investing in short-term securities with minimal credit risk, these funds aim to potentially mitigate any impact on capital invested and cushion investors from broader market fluctuations. Moreover, the diversified nature of money market fund portfolios helps mitigate specific risks associated with individual securities. The interest rate risk is also mitigated by the short maturity (up to one year) of the portfolio securities.

Return potential

Although money market funds prioritise relative stability and liquidity, they also seek to offer returns through interest payments received on their underlying securities. These funds have the potential to yield higher returns than those offered by traditional short-term savings avenues. However, returns are not guaranteed and may fluctuate based on market conditions.

Potential benefits in volatile markets

Relative stability of capital

Amidst market turmoil, limited impact on capital invested becomes the key concern for investors. Money market funds, with their focus on high-quality, short-term securities, prioritise less volatility on capital invested. However, neither returns nor limited impact on capital invested is guaranteed.

Managing liquidity

Liquidity is the ease with which an asset can be converted to cash without losing time or value. Market volatility may necessitate quick access to funds to capitalise on opportunities or meet unforeseen expenses. The underlying securities in money market funds are typically highly liquid because of their short duration and high credit quality.

Mitigating risk

By diversifying across a range of short-term securities and maintaining a focus on high credit quality, these funds can potentially help mitigate various risks, including credit risk and interest rate risk. This can lend potential stability to a portfolio during volatile times.

Bajaj Finserv AMC offers the Bajaj Finserv Money Market Fund, which can be considered by investors seeking a low-risk and liquid investment avenue for a short horizon of up to one year. It can also be considered by investors who want to diversify their portfolios to reduce overall risk.

Conclusion

Money market funds can play a crucial role in helping investors navigate volatile markets by offering reasonable return potential, liquidity, and risk mitigation. They can be suitable for short-term investors looking for a low-risk avenue or as a way to diversify a portfolio to add relative stability.

FAQs:

Do money market mutual funds pay interest or dividends?

Like other mutual funds, money market funds seek to pay Income Distribution cum capital withdrawal to those who choose the income distribution cum capital withdrawal (IDCW) option. The fund aims to pay IDCW through the profits it books or surplus it generates. The IDCW may fluctuate based on prevailing interest rates and the performance of the fund's investments. However, after payment of IDCW the NAV shall fall to the extent of payout and statutory levy.

How can investors choose a money market fund?

When selecting a money market fund, investors should consider factors such as the fund's investment objectives, expense ratio, credit quality of underlying securities and the fund manager’s experience and track record. You can also look at the fund’s historical data if it has been around for more than one year. Also make sure that the scheme’s risk level aligns with your risk appetite.

What is the minimum investment for a money market fund?

The minimum investment for a money market fund can vary depending on the fund provider and the specific fund in question. The minimum investment amount for the Bajaj Finserv Money Market Fund is Rs 1,000 for lumpsum as well as SIP.

Are money market funds completely risk-free?

No, money market funds are not entirely risk-free. While considered relatively low-risk, they are subject to market fluctuations and potential credit risk of the underlying securities. Loss of principal is possible, though rare.

How do money market funds compare to fixed deposits in terms of returns and liquidity?

Money market funds may offer potentially slightly higher returns than fixed deposits, but returns are subject to market conditions. Money market funds offer higher liquidity, allowing easier access to funds compared to fixed deposits, which typically have a lock-in period.

Who should consider investing in money market funds?

Investors with a moderate risk appetite, seeking potentially slightly higher returns than savings accounts or fixed deposits, and who value liquidity, might consider money market funds. They can be suitable for parking short-term funds. It must be noted that the returns from money market funds are not fixed, they are linked to market.

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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.