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Money Market Funds: All You Need to know

9 Mins 22 May 2023 0 COMMENT

What Is a Money Market Fund?

A money market fund is a short-term debt fund that makes investments in very liquid, short-term securities. It invests in several low-risk, high-quality short-term debt securities such as government bonds, commercial paper, and certificates of deposit. These funds have an average maturity period of over one year.

Money market funds provide investors with high liquidity and are regarded as low-risk investments. These funds are popular among investors looking to invest for the short term with expectations of decent returns. They offer the opportunity to earn a higher return on short-term cash holdings than traditional savings accounts.

Types of Money Market Funds

The following are the types of money market funds:

Liquid Funds: These funds are extremely low-risk and liquid since they invest in money market securities with maturities of up to 91 days.

Ultra Short Duration Funds: These money market funds are slightly riskier than liquid funds as they invest in debt and money market securities with maturities of up to six months.

Short Duration Funds: These funds are slightly riskier than ultra-short-duration funds because they invest in debt and money market instruments such that the Macaulay Duration of their portfolio is 6 to 12 months.

Overnight Funds: These money market funds are exceptionally low-risk and highly liquid because they invest in assets that mature overnight, including tri-party repo, collateralised borrowing and lending obligations (CBLO), and repo.

Money Market Funds: These invest in various money market instruments, including commercial papers, certificates of deposits, treasury bills, and short-term bonds, making them significantly riskier than liquid funds.

How a Money Market Fund Works?

Money market funds purchase short-term, low-risk debt instruments by pooling funds from several investors. As the median maturity of these securities is 13 months or fewer, there is less chance of high impact of interest rate changes and credit defaults.

You, as an investor, can buy shares of the money market funds and sell at the Net Asset Value (NAV), and investors normally have access to this market every day. In order to maintain the required amount of liquidity and stability, the fund manager will employ investor cash inflows and outflows to buy and sell securities. Although they nevertheless contain some risk of loss, money market funds are typically seen as a low-risk investing alternative. They must adhere to tight investing criteria to guarantee liquidity and stability.

How to invest in Money Market Funds?

Investing in money market funds is a simple process. Firstly, you need to choose a mutual fund company or financial institution that offers money market funds. Then, you need to fill out the necessary application forms and provide the required KYC (Know Your Customer) documents such as Aadhar Card and PAN Card. Make the payment.

Once you invest in money market funds, you must track them regularly and review their performance periodically. Money Market Funds are not risk-free, and the returns may depend on the market conditions. Therefore, investors must do proper research and consult with a financial advisor before making any investment decisions.

Advantages and Disadvantages of Money Market Funds

Despite being extremely liquid investments, there are a few things we need to be certain of in order to fully comprehend the long-term advantages and disadvantages of money market funds.

Advantages of Money Market Funds

Due to the low-risk character of these products, we can earn significantly more interest on money market funds than on a standard savings account.

Money market funds offer a high level of liquidity as they invest in secure and highly liquid debt-based assets and hence, provide investors safe avenue for investing. The fund itself, as well as all earnings from the fund, are easily trackable and manageable.

Disadvantages of Money Market Funds

Being a debt mutual fund, there is credit risk involved in investing in money market instruments. Credit risk refers to the issuers’ failure of meeting their interest and/or principal payment obligations.

If the investing company decides to change the fund’s structure, some money market funds may ask you to lock in your money. Any party can choose to have all of their money locked in for two or three years at a time.

Money market funds are slow earners, but waiting to see your money grow could mean missing out on other types of mutual funds that can earn far more quickly.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.