Money market mutual funds invest in money market instruments characterised by short maturities (no longer than 12 months) and minimal credit risk.
These funds are among the lowest-volatility types of investments. Income generated by such a fund is either taxable or tax-exempt; this depends on the types of securities the fund invests in.
Typically, the money market is an exchange where the trade of cash and cash-equivalent instruments is undertaken. The instruments that are generally traded in the money markets have varying maturities that can range from overnight to 12 months.
A few examples of money market instruments include treasury bills (T-Bills), certificates of deposit (CD), repurchase agreements (repo), and commercial paper (CP), to list a few.
Generally, a money market fund invests in money market instruments with the aim of offering decent returns while keeping the net asset value (NAV) fluctuations minimal.
The money market funds invest in short-term and highly stable debt securities, which have comparatively low risk. Considering the investments keep going, the money market mutual fund rates are viewed as relatively safe, even when they are not completely risk-free.
Investors who want to invest for quite a short term (90-365 days) and are looking for an alternative to bank accounts or deposits can consider investing in money market funds.
An investor should take into account returns and risks which are applicable to debt funds, like credit risk and interest rate risk, before investing in a money market mutual fund. In addition, a fund manager may invest in instruments with a bit higher risk component to increase returns.
Focus on investing in money market funds with a lower expense ratio, which is a small percentage of the total assets of the fund charged by the asset management company (AMC) or fund house as part of fund management services.
Money market funds allow diversification of portfolios, thus helping an investor to spread the risk across various instruments.
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.