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What is a money market fund?

Money market fund is also called a liquid fund. They invest in money market instruments such as treasury bills, commercial paper and certificates of deposit with a maturity term under 91 days. They also invest in short term debt which matures in a time period under a year.

Returns from the money market fund

Money market funds give good returns, in times of high inflation. When RBI raises rates or keeps them high, Money market funds give good returns.

Why invest in Money Market Funds

Liquidity

These funds are extremely liquid. You can buy and sell them within a day. You are not charged an entry or an exit fee.

A Good Saving

You can keep your extra cash in a money market fund and earn higher interest than a savings bank account.

Safety

Safer than most debt funds. They invest in fixed income securities with very short maturity. Low on risk.

Taxation

Dividends are tax free in your hands. The profit you make in the long term is taxed with an indexation benefit.

Types of money market funds

Money market funds come with different plans. You have the growth plans, daily dividend plans, weekly and even monthly dividend plans. Growth plans do not give you any dividends. You can also invest in direct plans which have a lower expense ratio as there are no intermediary charges.

Taxation of money market funds

Short term capital gains (gains under 3 years), are added to your taxable salary. Taxed as per income tax slab you fall under. Long term capital gains (gains over 3 years), are taxed at 20% with indexation.

 

Concepts & FAQ's Money Market Funds

What is a Money Market Mutual Fund?

In a Money Market Mutual Fund, the money is invested high-quality and very short maturity-based "money market instruments/securites". The maturity ranges from overnight to one year. These securities that are invested in are are deemed to be close substitutes of money.

Money market securities/instruments (Treasury bills, Call money, Commercial paper, Certificates of deposit etc.) are issued by governments, financial institutions and large corporations to raise money. The investor that buys these financial instruments/securities effectively acts as a lender who is entitled to interest at the time of repayment/maturity. Money Market Securities are traded in very high denominations. This limits access for the individual investor. The easiest way for us to gain access to the money market is with a Money Market Mutual Fund.

Thinking of buying a Money Market Funds ?

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Difference between "Debt Mutual Fund" and "Money Market Mutual Fund"

The very short term maturity period of Money Market Mutual Fund is its main characteristic. The investment in Money market Mutual Fund is done in money market securities (that matures in less than one year) compared to Debt Mutual Funds that invest in bonds which also gives assured returns but the maturity period is relatively higher. Money market investments are also called cash investments because of their short maturities.

For what kind of investors is Money Market Mutual Funds suitable?

Money Market Mutual Funds are a safe investment. You won't get great returns, but you won't have to worry about losing your principal. A money market mutual fund's purpose is to provide investors with a safe place to invest easily accessible cash-equivalent.

Frequently Asked Questions

What is the Money Market?

The Money Market is basically concerned with the issue and trading of securities with short term maturities or quasi-money instruments. The Instruments traded in the money-market are Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such instruments of short-term maturities (i.e. not exceeding 1 year with regard to the original maturity)

What is Call Money Market ?

The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as 'Call Money', and if it exceeds one day (but less than 15 days) it is referred to as 'Notice Money'. Term Money refers to Money lent for 15 days or more in the InterBank Market.

What are different money market instruments?

Money market instruments include call money, repos, T-bills, commercial paper, certificate of deposits and collateralized borrowing and lending obligations

What is Commercial Paper (CP)?

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

What are T-bills?

Treasury bills are actually a class of Central Government Securities. Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. The T-Bill of the following periods are currently issued by Government/Reserve Bank of India in Primary Market : 91-day, 182-day and 364-day T-Bills. All these are issued at a discount-to-face value.

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Money Market Funds Articles

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Liquid Funds Vs Fixed Deposits

14 June 2018, Thursday    

Investors look for safety when it comes to money. It is the first thing they look for in an investment. Based on the amount of risk that investors are willing to take, they are divided into three types: Aggressive investors Moderate Investors Conservative Investors. Although there are ....

Features Of Indian Money Market

05 June 2018, Tuesday    

Money Market is a Market for trading in short-term loans between banks and financial institutions. Participants in the money market borrow and lend for the short term. The short-term instruments in the Money Market are inter-bank call money market, Treasury Bills (91 days and 364 days), Certifica ....

Want To Invest In Mutual Funds? Be An Early Bird

26 December 2017, Tuesday    

Investing in mutual funds is a great option if you want to earn handsome returns. If you are planning to invest in mutual funds, you should start as early as possible. Investing in mutual funds at a young age will give you the advantage of staying invested for long periods of time. Staying invest ....

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LIC Mutual Fund launches overnight fund

Thursday, July 11, 2019, 4:49 PM

LIC Mutual Fund has launched a new fund named LIC Overnight Fund, an open ended debt scheme investing in overnight securities. The new fund offer will be open for subscription on 15 July. The scheme will be benchmarked against Nifty 1D Rate Index. The scheme offers two investment options-growth and dividend option.

PPFAS Mutual Fund launches Parag Parikh Tax Saver Fund

Wednesday, July 3, 2019, 2:53 PM

PPFAS Mutual Fund has launched a new scheme Parag Parikh Tax Saver Fund. It is an open-ended ELSS with a statutory lock-in period of three-years. According to a press release by the fund house, the scheme aims to generate long-term capital appreciation through a diversified portfolio of equity and equity-related securities. The new fund offer opens for subscription on July-4 and closes on July-18-2019.
 

Government set to launch financial sector ETF

Thursday, June 27, 2019, 12:18 PM

The government will set up a financial sector exchange trade fund (ETF) comprising shares of listed public sector banks, insurance companies and state run financial institutions. The department of investment and public asset management (DIPAM) on Thursday invited expression of interest (EoI) for appointment of an advisor to create this fund.

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What Is Financial Market?

Saturday, January 19, 2019, 6:00 PM

As the name suggests, financial market is a marketplace where the trading of financial instruments like bonds, mutual funds and shares takes place. It is an arrangement or institution that facilitates trading and where buyers and the sellers aggregate to trade in financial products. The financial market can be classified into the primary and secondary market.

What is a Systematic Investment Plan?

Wednesday, September 5, 2018, 5:28 PM

A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

What is Net Asset Value (NAV)?

Wednesday, September 5, 2018, 11:19 AM

NAV is the total value of all the mutual funds assets minus the value of all its liabilities per unit. It is the price at which you buy or sell units of a mutual fund. The assets of a mutual fund are securities like equity shares, bonds, commercial papers and debentures. Accrued interest and dividends are also the assets of the Mutual Fund.

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