A Beginners Guide to Money Market Mutual Funds

It is quite common to use the terms money market funds and liquid funds interchangeably. The differences are minor and for the purpose of understanding you can just ignore the difference at this point of time. Typically, the idea of money market funds is to restrict the investment portfolio to assets that have a very short term maturity profile of less than 91 days.

That is the typical profile of a money market fund with a large chunk of its assets deployed in assets with a residual maturity of less than 60 days. By holding assets with maturity of less than 60 days, money market funds can avoid the mark-to market risk that most long-term debt funds run.

The big investors in money market funds are the institutions, corporates and banks who park money in money market mutual funds. These funds will invest in instruments like call money, CBLO, repo, reverse repo, commercial paper and certificates of deposit. Since, the investments are stop gap in nature till a major outlay comes back, it has to be invested in liquid instruments with a low maturity profile.

How much returns can I expect in a money market mutual fund?

It would entirely depend on two factors viz. the rate of interest prevailing in the market and the time you hold it for. It is not like an equity fund wherein longer term investment returns are much higher. There will be some difference but the difference is normally very small. Remember that money market funds are extremely liquid and are therefore classified as near-cash instruments.

In terms of returns and risk they are comparable to savings bank accounts where one can enter and exit at very short notice. Most money market funds offer same day redemption credit to fund holders. Since they invest in government backed paper of very short maturity, these money market funds are immune to default risk and substantially to interest rate risk too.

What are the best money market funds in India in terms of returns

The returns across various money market funds are approximately not too different. However, as the table below depicts, the yields do become a lot higher if held for long periods. But, normally these are short term investments held as a stop gap arrangement and so very long term returns may not be too relevant.

    Return (%) Direct Plans
Scheme Name NAV Direct 7 Days 1-Month 3-Months 6-Months 1-Year 3-Years Daily AUM (Cr.)
Aditya Birla Sun Life Money Manager Fund 295.22 2.97 3.75 3.49 3.87 3.94 6.35 16,381.97
Axis Money Market Fund 1,137.47 2.79 3.63 3.46 3.83 3.89   3,834.92
Baroda Money Market Fund 1,116.38 3.05 3.65 3.41 3.41 3.18   40.25
DSP Savings Fund 43.27 2.97 3.58 3.22 3.78 3.86 6.01 2,663.56
Edelweiss Money Market Fund 24.99 2.25 3.26 3.22 3.66 3.65 8.24 315.70
Franklin India Savings Fund 41.03 2.95 3.52 3.34 3.79 3.74 6.23 972.48
HDFC Money Market Fund 4,598.62 3.04 3.71 3.48 3.83 3.92 6.35 15,409.29
ICICI Prudential Money Market Fund 303.26 2.94 3.52 3.41 3.76 3.81 6.11 13,064.77
IDFC Money Manager Fund 34.51 2.69 3.34 3.26 3.55 3.63 5.69 2,798.28
Invesco India Money Market Fund 2,511.45 2.76 3.61 3.20 3.77 3.89 5.78 2,493.99
Kotak Money Market Fund 3,576.94 3.20 3.68 3.44 3.78 3.76 5.93 11,074.74
L&T Money Market Fund 21.98 2.56 3.57 3.22 3.51 3.37 6.04 970.46
Mirae Asset Money Market Fund 1,012.05 3.20 3.62 3.27       102.67
Nippon India Money Market Fund 3,308.47 2.85 3.84 3.51 3.82 3.89 6.11 7,826.57
PGIM India Money Market Fund 1,081.27 2.83 3.76 3.33 3.86 3.74   83.80
SBI Savings Fund 35.13 3.10 3.67 3.47 3.81 3.86 6.22 24,196.30
Sundaram Money Market Fund 12.00 3.83 3.26 3.18 3.47 3.47 5.60 49.00
Tata Money Market Fund 3,775.79 3.11 3.88 3.50 3.95 4.12 6.36 6,663.87
Union Money Market Fund 1,009.97 2.92 3.19 3.20       145.39
UTI Money Market Fund 2,459.91 3.04 3.62 3.47 3.80 3.83 6.08 7,718.14

Data Source: AMFI

Are money market funds better than a savings bank account?

Your average savings account pays an interest of around 3% so this is definitely a better option than a savings account since the returns are at least 100 basis points higher over a 1 year period. While this is not a big difference, it makes a lot of difference when you are look at large outlays by institutions and corporates.

Here, a gap of 100 bps can make a substantial difference to their overall yield since they need to park huge funds ahead of statutory requirements like payment of advance tax quarterly or payment of GST dues on a monthly basis. In such cases, the money market fund turns more productive.

How are money market fund yields likely to behave going ahead?

There is an interesting aspect you need to understand here. Firstly, if you look at long term debt funds, they gain from falling rates but lose out in rising rates scenario due to capital depreciation. It is the other way round. The capital loss is not much if the yield goes higher. However, since these are short term in nature, the yields get reset. So if rates rise then the yields rise and the investors earns more. But where are yields headed?

Several pointers hint at higher yields on money market funds going ahead, due to an overall rise in inflation as well as tighter liquidity expected. The US Fed has already tightened the monetary levers and that is going to put pressure on yields to move higher from here. There have been speculations that RBI would most likely hike rates sooner rather than later. That is good news for money market funds as it would mean higher yields.

Typically, the yields on money market instruments are not just a function of rate signals by the RBI but they are an outcome of the liquidity in the money markets. RBI has already starting cutting liquidity with its recent round of variable rate reverse repos (VRRR). In fact, money market yields are expected to start trending higher, and in the process benefit investors in this instrument.

Just a few steps to open your FREE Demat Account

We are redirecting you.

FREE Benefits Worth ₹ 5,000

By continuing, I accept the Terms & Conditions and agree to receive updates on Whatsapp

  • 0
    Per Order for ETF & Mutual Funds Brokerage

  • 20
    Per Order for Delivery, Intraday, F&O, Currency & Commodity