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What are the Instruments Purchased by a Money Market Fund? Research Team | Posted On Saturday, September 21,2019, 08:21 PM

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What are the Instruments Purchased by a Money Market Fund?



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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History of Money Market Mutual Funds

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.

Salient Features of Money Market Mutual Funds

  1. Money market mutual funds (MMMFs) have been proven to be the safest investment for people with a low-income level. These funds are issued by companies, banks, governments and others. The investors in MMMFs will benefit from the price differences.
  2. The investors in MMMFs have to understand and try to assess the investment risk, credit risk and reinvestment risk associated with these funds.
  3. The interest rates on MMFs are higher than the interest rates on regular savings accounts, but there is no guarantee on returns. Such funds are good for short-term to medium-term investment horizons. It has always been desirable to keep aside a portion of your total investment.

See Also: Different Types of Mutual Funds

Benefits of Investing Money in Money Market Mutual Funds

  • The prime benefit of investing money in MMMFs is that they are safer than other investments options such as equity investments. Investors can earn a good rate of return. They are highly liquid. It means that investors can convert their investments in cash easily.
  • The market’s liquidity permits investors to benefit from soaring rates of return. The funds also provide a greater amount of flexibility and may be issued and withdrawn in shorter tenures.

Steps to Invest in MMFs

  1. Investors first need to study the various types of money market funds and merits and demerits of every security. Weigh in the merits and demerits of private-securities versus government-securities. Begin building your portfolio.
  2. Recall your investment objectives set by you. Take a look at your fund options and understand whether or not the funds you have chosen serve the purpose. Analyze the previous performance of the schemes by collecting the data from online sources.
  3. Buy the funds you want online or through financial brokers. If you have decided to invest privately, refer trusted sites.
  4. Once you have invested, do not forget to track your investments. Be sure to maintain a track of all expiry dates or deadlines.
  5. Depending on whether money market mutual funds are private securities or government securities, they may be taxable or non-taxable.

Instruments Purchased by Money Market Funds

1. Deposits

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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