Money Market Funds – Risks, Returns & FAQs

Investors with a low-risk appetite always look for investment options that can offer easy access to their capital and help them earn a better profit than a traditional savings account.

In this article, we will discuss one of the debt-oriented investment options, ‘money market funds‘ that come with the features discussed earlier. Let’s dive in.

Money Market Funds Meaning & Definition

Money market funds are mutual funds that primarily invest in money market instruments. These short-term funds come with an average maturity of one year.

What Are Money Market Instruments? Money market instruments are short-term debt instruments characterized by low risk and high liquidity, typically having maturities of one year or less. Money market instruments include:

1. T-Bills (Treasury Bills)
2. CD (Certificate of Deposit)
3. CP (Commercial Paper)
4. Repos (Repurchase Agreements)
5. Others

[This May Help: Debt Mutual Funds & Their Types]

Best Money Market Funds In India

Based on the performance of the last 5 years, here is a list of some best money market funds. Note- The list does not comprise any recommendation or financial advice.

Advantages Of Money Market Funds

Money market funds offer the following advantages to their investors.

1. High Liquidity

High liquidity is a key feature of money market funds. This feature enables investors to buy or sell the units of the fund on any business day, allowing for quick access to their funds.

{Related: Liquid Funds}

2. Low Risk

Money market funds invest in short-term low-risk debt instruments such as treasury bills, commercial paper, and certificates of deposit. Hence these funds carry a low risk.

{Related: GILT Funds}

3. Competitive Yields

As an investor, if you compare the returns on the money market funds with those of bank deposits, you may prefer parking your savings in money market funds.

4. Convenience

Today, it is very convenient to invest in money market funds. The most popular way is online; however, you can also do it offline.

Risks & Returns

Money market funds are generally considered safe, but investors must know the involved risks.

1. Interest Rate Risk: Money market funds are sensitive to changes in interest rates. Changes in interest rates may impact your returns.

2. Credit Risk: Although money market funds typically invest in highly-rated and short-term debt instruments, there is still a small level of credit risk.

3. Liquidity Risk: While money market funds are designed to be highly liquid, there can be instances where liquidity becomes a concern, particularly during times of financial stress or market disruptions.

4. Market and Economic Risks: Broader market shifts, economic conditions, and geopolitical events can affect the performance of the fund.

5. Inflation Risks: Money market funds may not keep pace with inflation, meaning that the purchasing power of your investment may erode over time.

RETURNS: Based on top-performing money market funds, we can conclude that these funds offer average annual returns between 5% to 7%.

Things To Consider

Let’s discuss some important key points to consider before investing in money market funds.

A. Your Financial Goals: You should consider your financial goals before investing in any investment vehicle. It can help you achieve your goals easily.

B. Past Performance: Comparing the past performance of a fund with other funds and against benchmarks may help you decide if the fund is good to invest.

C. Expense Ratio: A high expense ratio can eat into your returns as it is deducted from the fund’s assets. So, it is important to compare the expense ratios of different schemes.

FAQs