Money Market Mutual Funds (MMMF) are schemes that invest in short term debt instruments, cash and cash equivalents that are of high quality. Because of this, money market mutual funds are considered as high quality instruments with low risk. They have a predictable return rate.
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The fund manager invests in high quality debt instruments of short term maturity under a year. These instruments earn interest, improving returns. MMMF reduces fluctuations in the net asset value (NAV) of the fund.
See Also: The Advantages of Money Market Funds
The most common types of money market instruments are:
Money market mutual funds are an investment option that can be considered by most people. It offers short term investment with high liquidity. It is a profitable source of income that can be earned within a limited time frame. As the fund invests in a variety of instruments, diversification of portfolio must be maintained.
MMMF offer higher returns in comparison to a regular savings account. An investor who wants to keep his money with stable and safe returns may consider MMMF as an option. However, if your objective is to invest for medium to long term plan, then MMMF is not the right option.
See Also: How Mutual Funds Work?
Keep an amount aside to meet unexpected situations in life in an emergency fund. Uncertainty is inevitable, and it becomes worse without adequate financial back up. To deal with this, it is important to maintain an emergency fund.
Emergency fund must be liquid. It is the most important criteria to be considered while investing for an emergency fund. It must allow you to withdraw cash without delay.
An ideal emergency fund must have at least 3 to 6 months of your salary set aside for the emergency.
You can categorize emergency funds as short term and long term, if organized financial security is your top priority.
Once you have collected enough money to serve the purpose of the emergency fund, it must be further invested. This ensures steady returns. Make sure you invest in less risky, more liquid instruments.
Money market mutual funds can be considered as a short term emergency fund option. It approves all the features to be included in a short term emergency fund. They are highly liquid. They have the additional benefit of earning high returns if the market rates are favorable. However, the risk involved in interest rate fluctuations is to be considered.
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