Money market mutual funds

A money market fund is a mutual fund open-ended scheme that invests solely in cash/cash equivalent securities with less than one year maturity, which are also often referred to as money market instruments. These investments are short-term very liquid investments with high credit rating. Money market fund's purpose is to provide investors with a safe place to invest in easily accessible cash-equivalent assets characterized as a low-risk, low-return investment. Because of their relatively low returns, it might not be feasible to use money market funds as a long-term investment option. This is mutual fund scheme that holds the objective to earn interest for investors without compromising the depletion of fund's Net Asset Value (NAV). Portfolios of money market mutual funds are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments. This scheme is not suitable for those who are willing to park their money for medium to long term say one year or above, because the returns generated by these schemes are much less than when compared to bank deposits with maturity period more than one year. Investors with a short investment horizon or with surplus cash and low risk appetite can invest in money market funds. These could include corporate as well as retail investors. If you don't have a large amount of cash in your savings bank account, then this option may not be not of interest to you. But if you have large cash surplus than money market funds can give you better returns than savings accounts.

Advantages:

In a falling market it is observed that traders flee the market by selling their holdings to minimize their losses. In those times of crisis, money market mutual funds are good investment options for investors. These funds are also a great investment tools for those investor who are interested for a comparatively safer investment option. Large financial institutions like banks and government approach money market mutual funds to manage their short term liquidity. Individual investors can invest in these funds through mutual fund companies.

Safety of the money invested

The main reason people use banks to hold their money is not because of the lucrative returns but because it gives a sense of security. On top of the physical security of a bank, there is the protection of the India Government. On the other hand, money market mutual funds are safe in a different way. There is no backing from the India Government, but the SEBI (Securities Exchange Board of India) carefully monitors money market funds like other mutual fund schemes. They generally only invest in financially

reliable securities which have an average maturity of less than 365 days. This results in a lot of Central government securities, State Government Bonds, Top rated debt instruments etc in the money market fund's portfolio which are the safest debt instruments. These money market mutual funds have a lower yield than the average market, but a better rate than your savings account.

Returns

A savings account might give you less return than Money market funds. This doesn't mean that you will always get better returns, but it does mean your chances of getting better returns are higher than with a savings account. As with bonds, the performance of money market funds are closely tied to the interest rates set by the Reserve Bank of India. When rates in the market are at very low levels, these types of funds tend to generate returns on the lower end of the range and not much more than a savings account. So make sure to be aware of the current interest rate environment and how it compares to your savings account rate before you move your money to a money market fund.

Accessibility

Money market funds are comparable to savings accounts as far as liquidity goes. There is usually free check-writing, electronic money transfer, facility to redeem without lock-in period etc. .

What money market securities are available in India?

Money market mutual funds can invest in below securities

1. Treasury Bills (T-Bills) 2. Repurchase Agreements (Repos) 3. Commercial Papers 4. Certificate of Deposits

Selecting a Fund

The various types of funds all invest in the same basket of securities within their section

(Government securities, high rated bonds etc) so the returns of a particular fund might vary a

minor percent from the others in its section. A fund with low operating costs therefore will

generally produce better yields. Annual operating expenses should be your measuring stick

when analyzing a fund. If a mutual fund is successful, the larger amounts of capital it controls

will translate into lower operating expenses for investors.

Keep in mind that although these investments are considered low risk, in their attempt to

outperform, some have reached for higher-yielding instruments that are outside the norm,

including company deposits, low rated debt instruments etc. so do your due diligence before

investing in any of these funds.

Thus we can say that money market offers superior avenues for deployment of bulk short term

funds in terms of risk, return and liquidity. Money market mutual funds make it possible for

retail investors to participate in money markets. Money market mutual funds enable retail

investors to earn money market yields otherwise available to large and institutional investors.

Money market mutual funds are usually rated by the rating agencies. So, check for the fund

ratings before investing ^3.

Author Box

Kotak Securities Ltd is one of the oldest and largest stock broker in India. We offer you investing facilities

in various instruments like equities, derivatives, currency derivatives, Mutual Funds and IPO, through

our branches and the internet. In addition to this we have a full-fledged Research Team with years of

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