Who Should Invest in Money Market Funds?

[Shashank Bhaskar]

Investors with a low-risk appetite always seek investment opportunities that maintain the liquidity of their funds and offer decent returns. Various Debt Funds are designed keeping this in mind, and Money Market Funds are one of them.

About Money Market Funds

Money Market Mutual Funds refer to short-term Debt Funds. They invest their corpus in different money market instruments, hoping to offer reasonable returns to the investors. They are open-ended and manage short-term cash needs. The average maturity of these funds is one year.

Who should invest?

A Money Market Fund maintains a diverse investment portfolio to offer a high short-term income to investors. Hence, you should add these funds to your portfolio of Mutual Funds in the following cases:

• You have a short investment horizon of up to one year
• You have surplus cash lying idle in a Savings Account
• You have a low-risk appetite

Both retail and corporate investors can consider these Mutual Funds. However, these funds are not ideal if you have a long-term or medium investment horizon.

Things to consider

When opting for a Money Market Investment, make sure you consider the following:

Returns

A Money Market Fund can offer high returns to investors, especially if you have idle cash. However, the returns on your investment are not guaranteed. This is because the Net Asset Value keeps changing.

Risks

Like any other Mutual Fund, Money Market Investments also have some risks. These include credit risks, interest rate risks, and reinvestment risks. The fund manager may also invest in high-risk securities with higher defaulting chances.

Financial goals

A Money Market Mutual Fund may be a good choice if you want to invest extra cash while maintaining liquidity. It also lets you diversify your portfolio.

Investment horizon

Money Market Funds are typically suitable for investors with an investment horizon spanning three months to one year. Hence, these funds are better for those with a very short-term or short-term investment horizon.

Expense ratio

The expense ratio refers to the charge levied by the fund houses to manage the investment. This percentage is crucial when deciding your gains from a Money Market Fund. A lower expense ratio ensures higher profits. This is because the returns on these funds are not too high. Hence, you should ascertain the expense ratio to maximise your gains.

Taxes

When you invest in Money Market Funds, your gains are classified as capital gains since these are Debt Funds, and your holding period determines the tax rate. When this period is less than three years, you make Short-term Capital Gains and are taxed accordingly. On the other hand, you make Long-term Capital Gains when you stay invested for over three years.