Money Market mutual fund

A money market mutual fund is a kind of mutual fund that invests in ultra-safe or low risk securities. The purpose of the fund is to conserve the capital of the fund and it is unusual to see the NAV of a money market mutual fund go below one. The NAV can go below one if the securities do badly but it is quite rare to happen.

A Money Market Mutual fund is meant for people who wish to maintain their capital and park their short-term cash into a safety that gives - stable but low returns. It is also used by citizens who want to balance their portfolio and build in some security. If you have a lot of stocks in your portfolio then money market funds can balance your overall portfolio by providing capital safety.

Money Market Mutual Funds present - securities of domestic and foreign issuers. They are securities that are naturally - high quality (low risk) short term securities that can have a fixed, floating or changeable interest rate.

A money market mutual fund in india usually invests in the following type of assets:

A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free.

Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.

See Also: Money Market Instruments

What is Money Market mutual fund?

A money market mutual fund is a kind of mutual fund that invests in safe and low risk securities. These are good short term investment options available to retail investors in India. Money Market Mutual Funds are used to manage the short-term cash needs. It is an open-ended scheme in the debt fund category that deals only with cash or cash equivalents. As these securities have an average maturity of one year, they are termed as market instruments. Money market mutual funds invest in treasury bills, certificate of deposit, commercial papers and repurchase agreements.

Purpose of Money Market Mutual Funds:

Listed below are some of the uses of money market mutual funds:

• The money market mutual funds help in Industrial financing by providing short term funding. Short term funding from money markets can help industries finance day to day operations and meet working capital requirements.
• The money market mutual funds are a profitable and safe investment option for investors who wants to invest in low risk mutual funds
• These instruments help commercial banks and corporations borrow money from the market and give investors options to invest and generate income.

How do Money Market Mutual Funds work?

A money market mutual fund is a low risk security that is used to fund short term cash requirements. It is an open ended scheme that invests in debt securities of short term nature, that deals in cash and cash equivalent schemes. These instruments are short term investment options with an average maturity of one year. This is the reason these investment instruments are termed as money market instruments.

Like mutual funds, money market mutual funds are also managed by fund managers who invest in debt instruments like treasury bills, repurchase agreements, commercial papers or cash equivalents. The fund managers are responsible for managing these funds and earning return for the investor.

Types of Money Market Mutual Funds:

There are mainly four types of money market mutual funds in which the investor can choose to invest. It is important to know in detail on this investment instrument before investing in these debt instruments. Here are the various money market instruments that are available in the market for investment:

Certificate of deposit:

A certificate of deposit is a savings instrument that is similar to fixed deposit. However unlike fixed deposit, the certificate of deposit cannot be withdrawn before maturity. These deposits have a fixed maturity date and a specified rate of interest.

The certificate of deposit was introduced in Indian market in the year 1989 to increase the range of options of money market instruments. Certificates of deposit are issued by scheduled commercial banks and some select financial institutions in India and are monitored by the RBI. The RBI issues guidelines for certificate of deposit from time to time.

Commercial papers:

Commercial Paper is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990 with a view to enable highly rated corporate borrowers diversify their sources of short-term borrowings and to provide an additional instrument to investors. Commercial paper is a money-market security, issued (sold) by large corporations to obtain funds to meet short-term debt obligations (for example, payroll), and is backed only by an issuing bank or company with a promise to pay the face value on the maturity date specified on the note.

Treasury bills:

Treasury bills are short term borrowing instruments issued by the government of India. These are the oldest money market instruments that are still in use. The treasury bills do not pay any interest, but are available at a discount to their face value at the time of issue. Treasury bills can be classified in two ways i.e. based on maturity and based on type. These are the safest instruments as these are backed by a guarantee of the government. The rate of return, also known as risk-free rate, is low on Treasury bills as compared to all other instruments.

Repurchase agreements:

It is an agreement under the reserve bank of India that lends money to commercial banks. The repurchase agreements mainly involve the sale and purchase of agreements at the same time

Advantages of Money Market mutual fund:

When it comes to investments, mutual funds are the best investment options in Indian market today. The investors are attracted towards mutual funds as these are good investment options that provide the investor higher returns. With money market mutual funds, the investor can invest in safe and stable instruments of investment that have a sovereign guarantee. Listed below are the advantages of money market mutual funds:

• Money market instruments are short term investment options, that have a maturity of less than a year. These are safe and effective investment options for investors.
• The best money market funds offer around 8% - 8.5% returns - nearly double that of a savings account.
• Money market funds are issued by the central and state governments, banks, PSUs and other corporates. 
• You can choose the desired fund as per its maturity period and associated risk.
• Money market mutual funds are rated by independent agencies, making it easy for you to pick the right fund.
• All the mutual funds are registered with SEBI. They function within the provisions of strict regulations created to protect the interests of the investor.

Special Features of Money Market Mutual Funds

• Money market mutual funds are one of the safest instruments of investment for the retail low income investor. The assets in a money market fund are invested in safe and stable instruments of investment issued by governments, banks and corporations etc.
• Generally, money market instruments require huge amount of investments and it is beyond the capacity of an ordinary retail investor to invest such large sums. Indian Money market funds allow retail investors the opportunity of investing in money market instrument and benefit from the price advantage.

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