Before investing in Money Market Fund, you should know what Money Market Funds are, how Money Market Funds work, and what are the different types of Money Market Mutual Funds. It will help in taking the right investment decision.
Money market mutual funds are considered the best option to earn money in the short term. Their quick liquidity feature attracts more investors to generate optimum returns at low risk. You can know how to invest in mutual funds to enhance your knowledge.
What is a money market fund?
Money market funds are short-term debt funds. They invest in various money market instruments such as Certificates of Deposit (CDs), Treasury Bills (T-Bills), Commercial Papers (CPs) etc. The average maturity period of money market mutual funds is one year.
Definition of Money Market Fund
Money Market Funds are those funds which have a maximum maturity period of 1 year, which gives investors higher returns within 7 days to 365 days as compared to fixed deposits and bank savings accounts.
Money market funds are fixed income mutual funds that invest in debt securities characterized by short maturity and minimal credit risk. Before investing in mutual funds, you must be aware of the different types of mutual funds.
These funds are designed in a way that allows the fund manager to generate higher returns while keeping the risk under control through adjustment of the loan tenure.
Money market funds are among the lowest-volatility types of mutual funds. They strive to deliver good returns over a period of up to one year while maintaining a high level of liquidity.
The income generated by money market mutual funds is either taxable or tax-free, depending on the type of securities. You also know about what is forex card and best Indian forex card.
Who can invest in Money Market Mutual Fund?
Being short-term debt funds, these funds are highly suitable for investors looking for low-risk investments for short duration.
These funds are considered ideal for an investment horizon of at least 3-6 months. These schemes offer better returns than bank fixed deposits of the same tenure.
The money market is an exchange where cash and cash equivalent instruments are traded. The maturity period of the instruments traded in the money markets can range from one day to one year.
Transactions in the money market are usually done in bulk by institutional buyers and sellers. Therefore, retail investors cannot take advantage of money market instruments. The only way for retail investors to invest in them is through mutual fund houses.
These funds are not completely safe, yet these funds carry the lowest risk as compared to equity and debt funds. These funds should be used to temporarily accumulate wealth and meet short-term goals.
These are not suitable for long term investment goals. But, you can invest in different types of Equity Funds to meet your long term objective.
Types of Money Market Funds
There are a variety of money market instruments available to investors as per the risk appetite, time period and liquidity requirement. Money market funds invest in high quality short-term debt instruments, cash and cash equivalents. There are mainly three types of money market funds available in the mutual fund industry.
Types of money market funds in which mutual fund companies invest most of their money – 1. Treasury Bills or T-Bills, 2. Certificates of Deposit or CDs, 3. Commercial Papers or CPs. We are discussing about the different types of these:
Treasury Bills or T-Bills
Treasury bills or T-bills are issued by the government to raise money for short periods of up to 365 days. Since these are issued by the government, they are considered very safe.
Treasury bills are issued at a discount to the principal amount and the buyer receives the principal amount at maturity. For example, a ₹ 100 treasury bill can be bought at ₹ 95, but the buyer receives ₹ 100 on the maturity date.
The returns on treasury bills depend on the liquidity position in the economy. When there is a liquidity crunch, the returns are higher and vice versa.
Certificate of Deposit or CD
A certificate of deposit or CD is a money market instrument issued by specific banks and financial institutions to individuals, companies and other entities. It is like a fixed deposit which offers a fixed rate of interest on the amount invested.
The maturity period of CDs issued by commercial banks can range from 7 days to 1 year. For financial institutions, it ranges from 1 year to 3 years. You can invest in Certificate of Deposit through top banks in India.
The fixed pre-specified tenure ensures that the amount invested cannot be recovered before the completion of the pre-specified tenure. The investment amount in this investment instrument is easily negotiable.
Commercial Paper or CP
Commercial paper (CP) is an unsecured and negotiable money market instrument in the form of a promissory note issued by companies to raise funds, usually for a period of up to one year.
CPs are generally issued at a discounted rate while redemption is done at face value. Investors can earn the difference between the discounted rate and the face value as income.
CP can be issued for a minimum maturity period of 7 days and up to a maximum of one year. However, the maturity date of the CP remains till the date the credit rating of the issuer is valid.
We discussed above three types of money market funds which can be helpful in making short term investment decisions. These investment options mostly invest in a variety of securities and assets, with the aim of higher returns.
A Money Market Fund’s primary objective is to provide investors a safe opportunity to make safe and highly liquid investments.
Investing in money market funds is considered almost safe as investors’ money is invested for less than 1 year.
These funds are also called as Fixed Income Fund, Low Risk Fund or Short Term Fund which offer 6-15% returns to the investors with minimal risk. Nevertheless, before investing you should get some basic information so that you do not face any unnecessary loss or problem.
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