If you are looking for less risky options to generate better returns within a short term then money market funds can be the best solution. You can maintain liquidity as well as grow your money conveniently through the money market funds.
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The money market funds are short term mutual funds that invest in highly-rated money market instruments. These funds are suitable for investors who want to invest their surplus cash in short term funds. These funds pool money from investors and help them diversify their investment portfolio by investing in high-quality funds. It gives better returns than a savings account while maintaining the liquidity of these funds. These funds have an average maturity of 1 year.
See Also: What are the Instruments Purchased by a Money Market Fund?
Money market funds can be divided into two categories: constant net asset value (CNAV) and accumulating NAV. The shares under the constant net asset value are issued in the market with a constant face value. The income obtained from such funds is accrued on a daily basis and can be divided among the investors or can be reinvested in the funds towards the month-end.
The accumulating NAV funds also operate under the same guidelines as its counterpart and the income is also accrued daily. The difference between the two lies in the fact that income under accumulating NAV is not distributed among the investors. Rather the income on these funds is reflected by an increase in the value of the funds.
The money market mutual funds are an ideal investment option for several reasons. The money market funds provide a high degree of short term income to the investors by investing in a well-diversified investment portfolio consisting of money market instruments. Investors looking to park their money for a short term can invest in these funds to get higher returns.
See Also: Money Market mutual fund
Some of the reasons why money market funds are an attractive investment avenue are as follows:
Diversification: Money market funds allow you to diversify your investment portfolio. These funds are an ideal investment avenue for an investor who has an investment horizon of 3 months to 1 year.
Credit risk: The money market funds are issued by companies that are AAA rated and these companies are required to follow high credit standards. However, these funds suffer from interest rate risk, credit risk and reinvestment risk. The MMF portfolio represents some level of risk as the fund manager invests in risky securities.
Simplicity and flexibility: These are simple investment tools that help you to grow your money in the short-term. You can remain invested till the time you want and can opt-out of the scheme without having to pay any penalties.
Liquidity: These funds are highly liquid. The money market funds are managed in a way that they can be converted into cash readily as per the requirement of the investor.
Fee: The Expense Ratio charged by the MMF is the only fee that the investor must bear. You do not have to pay any subscription or redemption fee while investing in such funds or redeeming your units. This gives you complete freedom to redeem or invest your assets under these funds as per your convenience.
Returns: The money market funds have the potential to offer better returns than a savings account. But there are no guaranteed returns. The NAV of these funds fluctuates with alteration in the interest rate regime.
Tax gains: the tax exemption on these funds depends on the holding period of the funds. The longer you stay invested the more tax benefits you receive. When you stay invested for a short tenure you make a short term capital gain (STCG). The STCG incurred from money market funds is added to your income and is taxed accordingly.
See Also: Money Market Mutual Funds: Basics, Types, Benefits and More
Investing in money market funds is simple and hassle-free. You need to open an online brokerage account with mutual fund companies/ brokerage firms that will help you to invest money into your money market account.
Money market fund is a good place to park your money while maintaining its liquidity. However, these are not the ideal option if you are looking to grow your money over a long period.
To start investing in a money market fund, follow the steps given below:
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