Investors who have a less tolerance for risk are always looking of investment alternatives that give them a good return and still preserve your liquidity money.
Additionally, the majority of investors prefer to evaluate the return on their investment in debt fund with the returns on bank deposits.
In the case of investment in short-term debt Money Market Funds are an option that is highly sought-after by investors.
In this article, we will look at and discuss the various kinds of market-based funds that are available in India as well as their benefits and more.
What are Money Market Funds?
The Money Market Funds (MMF) are also short-term debt funds. They invest in a variety of instruments of the money market and aim to earn decent returns over the course of one to two years and maintain the highest level of liquidity. The average term of the Money Market Fund is one year.
Types of Money Market Instruments
Money Market refers to an exchange that allows the trade of equivalent cash instruments and cash takes place. The instruments traded on the market have maturities that range from one day to a year. Here are the most important instruments of the money market in India.
Treasury Bills or T-Bills
It is the Government of India issues treasury bills to raise money for the duration of one year. Because they bill are issued by government officials, they’re thought to be extremely secure. However, less risk can translate into lower returns. This is the case for Treasury bills as well. The return on T-bills is less than other instruments of the money market.
Certificate of Deposit or CD
Certificate of Deposit is a term-deposit that is provided by commercial banks that are scheduled and doesn’t have the possibility of a premature redemption. The main difference between CD as opposed to FD are that the latter can be easily negotiated.
Repurchase Agreements or Repos
Repurchase agreements are made between the bank and RBI to facilitate loans for short periods of time. It could also be signed by two bank.
Commercial Paper or CP
Financial institutions and companies with a strong credit rating are able to issue commercial paper which is a short-term unsecure promissory note. It permits them to diversify their sources of short-term borrowing. CPs are typically issued at a discount rate and redemptions are made in the basis of their value. The investor gets the difference.
What is the process by which Money Market Funds work?
Money market funds invest in market instruments with the aim of generating high yields (interest income) while keeping NAV fluctuation to a minimum.
Based on the performance of the past five years, there are the top money market funds available in India:
Take note that this isn’t a recommendation but rather a list of highly-performing money market funds from India. Be sure to follow your investment plan prior to making a decision to invest.
Who can put money into the Money Market Fund?
Since these schemes are based on the money market, they are perfect for investors who have a lower risk tolerance as well as an investment period of as little as one year.
Typically, those who have idle money in their savings accounts could gain more returns by placing their money into these accounts.
It is crucial to remember that these funds should be recommended to investors with a short-term cash reserve that they do not require immediately.
Things to take into consideration prior to placing an investment into Money Market Funds in India
Here are a few important factors to consider prior to making a decision to invest into money market fund in India:
– Risks and Returns
These funds are considered debt funds, which mean they come with all the risks associated to them, such as credit risk and interest rate risk. In addition, the fund manager could invest in instruments that have an increased risk component to improve the returns.
Generally, the money market funds are able to provide better returns than a standard savings account. Its Net Asset Value, also known as the NAV for these money market funds can change when there is a change in interest rate.
– Expense Ratio
Because the returns aren’t excessively high The expense ratio plays a major role in determining the earnings you earn from a money-market fund.
“Expense Ratio” represents only a tiny percentage of the total funds’ assets that are charged to the house of funds for the management of funds.’
The ideal approach is to look for a fund with less expense ratios to get the most value.
– Invest in accordance with the guidelines of your Investment Plan
Typically, the money market funds are a good choice for investors who have an investment timeframe of 90 to 365 days.
