Are you looking to invest your surplus corpus in a financial instrument that offers you high safety and a good return? Money market mutual funds may be good investment options for you. What are money market funds? Money market funds are open-ended schemes that invest your money in highly liquid instruments such as commercial papers, certificates of deposits, purchase agreements, etc. They are short-term investments. The portfolio is being chosen to yield interest for investors.
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Money market funds were introduced by Bruce R Bent and Henry B R Bown in 1971 to the world of investment. These funds were reserve funds earlier. In India, these funds were introduced by the Reserve Bank of India (RBI) in April 1991 to give supplementary short-term investment avenues to the investors. Moreover, the RBI intends to make such funds accessible to individual investors.
See Also: Different Types of Mutual Funds
Fixed-term deposits may have a penalty imposed when the investment gets redeemed prior to the expiry date of the term. It is commonly observed that overnight deposits provide MMMFs with liquidity (natural). The quantum of deposits held over the last few years have been increased by money market funds.
See Also: Money Market mutual fund
2. Call accounts
Call accounts are the bank accounts where the investor may withdraw his/her funds. The investments are open-ended and will a higher a higher interest rate than standard deposits. Sometimes, they may take a short notice.
3. Government debt
Government debts are the bonds issued by a national government that pays a constant rate on a regular basis until the end of the maturity period. Government debts have lower risk compared to other money market funds.
4. Certificate of deposits (CD)
Banks issue certificate of deposits (CDs), which are just like deposits. CDs have a predefined maturity date and are traded on the secondary market. The buyers of CDs may get a competitive return.
5. Repurchase agreements
A repurchase agreement is an agreement to buy-back and sell a security after a given time period and at a predetermined rate. In this case, the duration may be fixed or overnight. For cash loans, the underlying securities do provide collateral.
6. Commercial paper
Commercial papers are issued by companies and banks in order to fund short-term credit requirements like payroll liabilities. They have a fixed maturity term, which may be as low as 270 days.
See Also: How Mutual Funds Work?
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