Money market funds have gained popularity among investors as an alternative investment option for those looking at a short time frame, which could be anywhere from three to six months.
Risk-averse investors looking out for better yields without considerable risk are zeroing in on these funds as they tend to offer a combination of safety, liquidity, and relatively stable returns.
In addition, taking into account the recent volatility in the markets, a few long-term investors are looking at money market funds as an interim solution. In October 2023, money market funds experienced net flows of Rs 6,248 crore, which is the second highest in the debt-oriented schemes.
Such funds allow investors to maintain liquidity and stability in the short term while strategically identifying and allocating their funds to more suitable long-term investment options as the market showcases signs of evolving.
With the adaptive approach, investors are able to navigate the current market upheaval while positioning themselves for long-term gains.
Amidst the universe of short-term investment options, money market funds provide flexibility by deploying funds in instruments maturing up to 12 months. Unlike other categories that have specific duration constraints, such as ultra short-term (3-6 months)and low-duration funds (6-12 months), money market funds can adjust their duration dynamically depending on market conditions.
Typically, money market funds invest in short-term debt instruments of maturity of up to one year and invest in treasury bills (T-Bills), commercial paper, and commercial deposits.
Investors go in for such funds as the underlying debt papers are of the highest quality and provide slightly better returns compared to liquid funds and overnight funds. Also, in case of any market corrections, they can deploy it in equity to take advantage of it. These funds offer safe options for short-term investments while providing an alternative to bank deposits.
Generally regarded as safe, money market funds are not risk-free. Before investing, one must consider the fund’s credit risk, interest rate risk, and liquidity risk. It is important to assess the fund’s portfolio quality, the fund manager’s expertise, and the overall economic scenario.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.