Money market funds – Everything you need to know

Not every mutual fund investor wishes to risk their entire finances with schemes that have a high risk returns tradeoff. Some investors might be switching from conservative schemes and beginning their mutual fund journey in anticipation of better returns than fixed interest rate offering schemes. Debt funds are a great mutual fund scheme category from investors carrying moderate to low risk appetite. These are ideal for anyone who wishes to earn capital appreciation by investing in mutual funds but doesn’t wish to risk their finances with equity oriented mutual fund schemes.

While equity mutual funds predominantly invest in equity and equity related instruments, debt funds invest in fixed income securities that generate regular income. Depending on the scheme’s investment objective and its asset allocation strategy, a debt scheme may invest across fixed income securities and money market instruments like company fixed deposits, commercial papers, debentures, G-sec, certificate of deposits, call money etc.

What are money market funds?

Investors who do not carry a high risk appetite yet seek capital appreciation from mutual funds, such individuals can invest in money market funds. The investment objective of a money market fund is to earn capital appreciation by investing in liquid assets and money market instruments that mature within one year. Money market funds offer high liquidity and thus make an ideal investment option for those with an equity heavy mutual fund portfolio. Money market funds might also be considered by those who are disappointed with the constant falling interest offering bank FDs and looking for a scheme that can offer better returns but without taking higher investment risk.

Benefits of investing in money market funds

No lock-in period – Unlike tax saving schemes like ELSS which come with a predetermined lock-in period of 3 years, money market funds have zero lock-in period. This concludes that investors are free to redeem their money market fund units to suit their income needs. Also, since there is no exit load, investors are ensured that there are no deductions on their capital gains irrespective of when the liquidate the scheme units.

Ideal for short term investment – IF you have recently inherited a lumpsum from an estranged relative or one of your FDs matured, you can park this money in a money market fund rather than letting it sit ideal in your savings account. The chances of you earning decent interest from investments in money market funds are high and hence, you can earn interest from the invested amount and use it for any of your financial needs.

Flexible investment option – You can either make a lumpsum investment or opt for a monthly SIP in a money market fund of your choice. A Systematic Investment Plan (SIP) is an investment process where you can invest small fixed amounts at regular intervals. Not everyone has surplus capital and SIP assures that you continue to save and invest a fixed sum till your investment objective is achieved. Investors can also refer to SIP calculator, a free online tool that gives you a rough estimate on the capital gains your SIP investment might fetch.

Dividend and growth plan – Investors can choose from growth or dividend plan both of which cater to a different group of individuals with different income needs. A dividend plan is suited from those seeking regular income whereas a growth plan reinvests the interest earned in anticipation of long term wealth creation.

Low expense ratio – Money market funds carry a low expense ratio which is a good sign as it will ensure that your capital gains do not get affected when you are liquidating money market fund units.

Those who are new to mutual fund investing, such individuals should consult a financial advisor before investing.