Benefits of Investing in Money Market Funds
Money market mutual funds are not an investment product but an avenue to park short term surplus. They are highly liquid and can be converted to cash at short notice. Also, the withdrawals can be structured as systematic investment plans(SIPs) so the post-tax returns can be more attractive than bank savings accounts. They allow you to earn higher returns compared to pure bank savings or checking accounts.
What is a Money Market Fund (MMF)?
As per the definition of mutual fund classification, money market mutual funds are classified as short term debt funds with the same tax implications as non-equity funds. These money market funds are open-ended with high return potential and they have proven to be one of the best investment options for short-term savings. The maturity period is usually not more than one year.
Money market mutual funds are extremely liquid and the impact cost is very low. Most mutual funds allow same day credit for money market mutual funds to help ease the treasury pressure for corporates and institutions.
Can You List Out Some of The Major Money Market Funds in India?
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 | 3.63 | 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 | 3.47 | 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 |
Normally, there is little to choose between these money market funds and as you can see the difference in yields on an annualized basis is quite marginal.
What are the Different Instruments That Money Market Funds Invest in?
There are many types of high liquidity instruments that money market mutual funds would typically invest in. They include
- Treasury Bills or T-bills typically come with 91-day maturity and 364 day maturity. These treasury bills or T-Bills are short-term government bonds and securities. The Reserve Bank of India generally issues treasury bills at regular intervals at discounted rates. You can redeem them at face value at the time of maturity. They work like short term deep discounted bonds.
- Repurchase agreements or repos are the most popular form of money market instrument and is tantamount to lending in the money market. These are released to control the supply of money. It involves the sale of a deal at a price and purchasing the same at a higher price in future. It is a back to back transaction.
- Commercial papers or CPs are typically issued by corporates, primary dealers and major financial institutes in India. These CPs are typically unsecured financial instruments. These papers are issued in the form of promissory notes and are short term low risk form of funding for institutions.
- Certificates of deposits or CDs are issued by banks, unlike CPs that are issued by corporates. CD is an agreement where you deposit money in a bank for a fixed period. The longer the deposit period, the higher will be the interest rate commitment. These are extremely low on risk.
Is Investing in Money Market Mutual Funds Ideal for me?
There are no hard and fast rules and it would depend on your financial goals and liquidity needs. However, here are some pointers.
- You have savings in a bank account and want to utilise it for investment. These can be temporarily parked in a money market mutual fund.
- You are looking for a low-risk investment option with relatively higher returns potential as compared to a plain vanilla bank deposit.
- You are a corporate or a retail investor and looking to park funds profitably till there is the actual due dates for advance tax or GST coming up.
Advantages of Market Mutual Fund
As stated earlier, here are some key advantages of parking money in a money market mutual fund.
- They are very low on the risk scale. If you have a low-risk appetite, you can choose money market fund investment. The AMC managing the MMMF ensures that the risks are limited, and investor’s interests are secured. Investors should opt for this type of financial instrument rather than opening a savings account with a bank.
- They are relatively better on returns compared to bank savings accounts. In comparison to other cash equivalents, money market fund offers high returns. However, it depends on the Net Asset Value (NAV) that keeps on changing with the rise or fall in the liquidity in the money markets. The NAV of the money market fund is also vulnerable to changes in the market interest rates
- Liquidity is what money market funds are all about. In simple terms, you can usually get your money out on the same day or at the most on the next day with limited capital impact. Besides, it is convenient wherein you have the flexibility to withdraw your money from money market fund with no exit loads. This gives you easy access to cash, whenever you want.
It is best to invest money in low-risk financial instruments instead of saving them in a bank account. However, it wouldn’t be an ideal investment tool if you aim to start a medium to long-term investment goal. Remember, money market mutual funds are not an investment but just an avenue to park temporary surpluses in a more profitable manner.