The money invested in money market mutual funds can be used for emergency hospitalisation, child’s school fees, vacation planned over the next 2 to 3 months.
Are you looking to park your excess money in an instrument that gives you high safety, a bit of returns as well as high liquidity? Money market mutual funds could be one of the good options to look at. But what are these funds?
A money market mutual fund is an open-ended scheme, which invests your money in ultra-safe and high-quality liquid instruments like treasury bills, commercial paper, certificates of deposits and repurchase agreements, with having less than one-year of maturity time period. These mutual funds especially, the liquid fund invests your money in very short-term market instruments with maturity up to 91 days where you can actually keep your money for very short periods of 1-3 months and this can serve as an emergency fund.
C.S. Sudheer, founder, indianmoney.com said the money stored in a liquid fund can be used for emergency hospitalisation, child’s school fees, vacation planned over the next 2 months or even for living expenses if you lose your job. “Equity investors use Systematic Transfer Plans (STP) to transfer funds from equity schemes to less risky liquid funds. This protects the investment, especially if you are close to retirement,” he said.
Here are some money market mutual funds which are worth making an investment:
Debt Funds: The main aim of investing in a debt fund is to earn interest income and also enjoy capital appreciation. Debt funds are an excellent investment for conservative investors and are suitable for both short-term and medium-term investment horizons.
Sudheer said for short-term horizons, consider liquid funds which offer higher returns than SB accounts (in the range of 6.5-7.5%), with similar kind of liquidity to meet a financial emergency. And, for medium-term horizons like 3-5 years, consider debt funds like dynamic bond funds, where the fund manager keeps changing the portfolio duration by buying and selling securities with higher/lower maturities. “Dynamic bond funds aim to give investors good returns during both rising and falling interest rates. They are very good for investors who struggle to predict interest rates,” he said.
Gilt Funds: These are debt mutual funds, which invest your money in Government Bonds and Securities. Gilt funds give you the double benefits of safety and good returns. Gilt funds invest in Government Bonds with almost no risk to the investment. They allow you to diversify your portfolio and earn guaranteed returns.
“Gilt funds are a very good investment in a falling interest rate regime because as yields fall, the price rises. This is the time NAV of gilt funds rises. Invest in Gilt funds if you foresee a fall in interest rates in the near future,” said Sudheer.
Fixed Maturity Plans: FMPs are closed-ended debt funds, which have a maturity period of one month to five years. These invest your money in certificates of deposits, ‘AAA’ rated corporate bonds, commercial paper, money market instruments and even bank FDs. The funds are highly suitable for risk-averse investors. If you want to invest money for a fixed tenure to meet certain financial goals, consider investing in FMPs. Especially, retired people who want flexible and regular returns can consider investing in this mutual fund. It also helps in saving tax if you fall in the high-income tax bracket. Although FMPs earn similar returns as compared to FDs but attracts a much lower tax rate because of the indexation benefit, which they get on long-term capital gains.
Five important factor why you should invest in these funds
Asset composition: The funds tend to invest in various instruments like money market instruments, corporate bonds, government securities, cash etc and therefore, knowing the composition will help in predicting and understanding the strategy of the portfolio manager.
Maturity profile: It shows the maturity of all holdings of the fund’s portfolio. This aids in comprehending the interest rate risk based on the fund’s investments in various maturity bonds/G Secs/money market instruments.
Credit quality: As per the scheme’s investment strategy, these funds can invest in securities with different credit ratings. “These ratings are an indication of the creditworthiness of the borrower. Higher rating implies higher creditworthiness of the borrower,” said Abhinav Angirish, Founder, investonline.in.
Provide decent return: A money market fund gives higher returns when compared to savings bank accounts and enjoys high liquidity. If you have extra cash in the SB account, then consider money market funds for making investments.
Check scheme track record: Angirish said picking the fund that is leading in the ideal maturity is not the sure shot way to choose a good debt fund. Just like equities, some debt funds are better at navigating bull markets than bearish ones. “So, it makes sense to check out a debt fund’s track record over a period of time to assess its performance,” he said.
