Investors with a lower risk tolerance are always on the lookout for investment options that can offer them good returns while maintaining the liquidity of their funds. Several debt funds have been designed keeping this aspect in mind. Also, most investors tend to compare the returns on their debt fund investments with bank deposits. When it comes to short-term debt investing, Money Market Funds have been a preferred option among such investors.
Here, we will explore and talk about the different types of money market funds in India, along with their benefits and a lot more.
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Money Market mutual funds are short-term debt funds. They invest in various money market instruments and endeavour to offer good returns over a period of up to one year while maintaining high levels of liquidity. The average maturity of these funds is one year.
The core characteristics of a Money Market Mutual fund are:
Money Market is an exchange where the trade of cash and cash-equivalent instruments takes place. The instruments that are traded in the money markets have maturities that can vary from overnight to one year. Here are some key money market instruments in India:
The Government of India issues treasury bills to raise funds for a period of up to 365 days. Since these are issued by the government, they are considered to be very safe. However, lower risks also translate into lower returns, which is the case with treasury bills, too. The returns on T-bills are lower than other money market instruments.
A CD is a term deposit that is offered by scheduled commercial banks and does not have the option of premature redemption. The primary difference between a CD and an FD is that CDs are freely negotiable.
A repurchase agreement is made between a bank and RBI to facilitate short-term loans. It can also be made between two banks.
Companies and financial institutions with a high credit rating can issue a commercial paper, which is a short-term, unsecured promissory note. It allows such entities to diversify their short-term borrowing sources. CPs are usually issued at a discounted rate, while the redemption is done at face value. The investor earns the difference.
A money market mutual fund invests in money market instruments with the objective of offering good returns (interest income) and keeping the NAV fluctuations minimal. Usually, the returns from the money market funds are more than the savings account.
You can easily invest in money market funds through:
The significant benefits of investing Money Market Funds are:
In the case of Money Market Funds, the taxation rules are as follows:
Capital Gains Tax
If you hold the units of the scheme for a period of up to three years, then the capital gains earned by you are called short-term capital gains or STCG. STCG is added to your taxable income and taxed as per the applicable income tax slab.
If you hold the units of the scheme for more than three years, then the capital gains earned by you are called long-term capital gains or LTCG. LTCG is taxed at 20% with indexation benefits.
FAQ
Q1. What is money market fund meaning?
A money market is a market for securities that have a short maturity date of up to one year. A money market is made up of banks, non-banking financial institutions, and acceptance houses, and it facilitates transactions for short-term cash while also preserving adequate liquidity in the market.
Q2. How do money market funds work?
This fund functions similarly to mutual funds. They sell redeemable units or shares to investors and are required to meet financial authorities' standards.
Q3. How do you invest in money market funds?
You can invest in these funds directly through AMC or by registering with platforms such as Groww.
Q4. What kind of risk do Money market funds have?
These funds are risky in terms of interest rate offered, credit, and reinvestment, suggesting that as interest rates rise, the underlying asset's value falls.
Q5. How to maximize returns from money market mutual funds?
Though these funds are safe, investing in them for an extended length of time reduces profits in contrast to bonds.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
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