Mutual Funds are the new (or not too new actually) hot cakes when it comes to investing. With easy accessibility and diverse schemes to fit everyone’s capacity, mutual funds are new hit. It offers a scheme to fit everyone’s individual investment capacity. Therefore, it is slowly taking over older patterns of investing such as fixed deposits and post office schemes.
Mutual funds can come up with various levels of risk and duration. You should pick investment funds that align with your goals. One such type of mutual fund is the Money Market Fund.
What is Money Market Fund?
To put it simply, Money Market Funds are a type of debt funds that usually last for a duration of up to 1 year and lend to companies within this duration. These short-term mutual funds are a great option of investment for people who want to generate return while being able to control the lending duration and hence being in charge of the risk factor as well.
How do Money Market Funds work?
A Money Market Fund typically invests in short-term money market instruments. The interest rates of various instruments are controlled by the Reserve Bank of India in our country. Apart from being low on risks, these funds also meet the short-term needs of borrowers. Money Market funds are highly liquid in nature, with most of the instruments promising a fixed return.
Types of Money Market instruments in India
The Reserve Bank of India issues Treasury Bills on behalf of the Government of India. These bills are issued at a discounted rate and the investor is eligible to get the face value amount at the time of maturity. The differentiated amount between the discounted rate and the face value is considered as interest earned by the investor. Treasury Bills, which come with a maturity period of 91 days, 182 days or 1 year, are one of the safest short-term investment options and can be bought by an individual or a company both.
Commercial bills are not only a popular instrument for investment but are also beneficial to companies that need to raise money to quench their short-term business needs. In this type of instrument, businesses issue promissory notes to the investor. It is to be noted that this particular instrument is unsecured and the only security here is the concerned company’s credibility.
CD or Certificate of Deposit
Certificate of Deposit is a certain type of financial asset where the investor can earn a fixed rate of interest on the money invested. While a CD sounds similar to fixed deposits, one needs to invest a minimum of 1 lakh Rs (or in multiples of that) if opting for CD. CDs can be issued by both banks or other financial institutions, and the maturity period varies depending on who’s issuing it. In case of a bank, it starts from as little as one week and goes up to a year. In case of non-banking financial institutes, it can be somewhere between 1 to 3 years.
A Repurchase Agreement is an arrangement between two parties where the investor buys a security with the seller promising to buy it back at a date mutually agreed upon by both parties. The selling price of the security would include the interest at which the buyer would buy it; this security rate is known as the repo rate.
In this process, scheduled commercial banks can carry out banking tasks. They can issue loans and accept deposits. The banking tasks are not limited to issuing loans and deposits here.
Scheduled commercial banks: Banks that are included in the second schedule of RBI Act 1934.
Who should invest in Money Market Funds?
- Those whose risk-tolerance level is not too high
- Those who do not want to lock their investment for too long
- Investors who have idle money and want to earn better interests by investing
Advantages of Money Market Fund
- Stability: The investment market can be really volatile. However, Money Market Funds are considered one of the most stable options for investment. In addition, investors also earn good stable returns.
- Security: Money Market Funds usually come with low risk and shorter duration. Therefore, making it a much safer option to invest.
- Liquidity: These funds are highly liquid because they are invested only in fixed-income instruments.
- Short duration: It is a great option for investors who want to utilize their idle money for a brief period of time and earn interest.
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