If you are looking for a reliable investment option for short-term goals then the foremost way is to invest in money market funds.
Money market funds are a good investment option for people looking for certainty and liquidity. These funds provide a low-risk opportunity to park your cash and earn small returns, making them ideal for short-term goals or as a temporary haven during the trading period.
What is a Money Market Fund?
Money market fund, commonly known as liquid funds in India, are a type of mutual fund designed for investors who want to invest in mutual fund while making reliable and affordable investments with easy returns. These funds typically trade short-term, suboptimal financial instruments such as Treasury bills, commercial paper, certificates of deposit, and short-term debt.
Types:
- Liquid Funds
Liquid mutual funds are the most popular type of money market funds in India. Liquid fund investment makes a short-term investment in real estate, usually not exceeding 91 days.
- Ultra Short-Term Funds
Ultra Short-Term Funds strike a balance between income and slightly higher returns. Compared to liquid funds, they invest in instruments with a slightly longer term, usually between 3 months and 1 year.
- Low Duration Funds
Low-duration funds have a medium investment duration, usually ranging from 6 months to 1 year. They invest in a combination of financial instruments and short-term debt. These funds may offer slightly higher returns than short-term funds, but they also carry slightly higher risk.
- Money Market Funds
Money market funds, as the name suggests, generally invest in financial instruments. Their shorter average maturity compared to other types of debt makes them suitable for investors who want to keep their investments liquid and earn higher returns than traditional savings accounts.
- Overnight Funds
Overnight funds are a special category that invests in ultra-short-term bonds that mature in just one day. These funds have very low risk and provide high returns. Investors looking for a particularly reliable place to park their daily money may consider overnight funds.
How Does it Work?
- Portfolio Composition: The fund invests mainly in bonds, commercial paper, certificates of deposit, and other short-term debt instruments. These investments are carefully selected to reduce credit risk and volatility.
- Net Asset Value (NAV): The value of each unit or share of an investment fund is called Net Asset Value (NAV). NAV is calculated daily based on the market value of the underlying asset. Generally, the NAV of the mutual fund remains close to its original or par value.
- Liquidity: Investors may purchase or redeem money market fund units at the applicable NAV on any business day. Refunds are generally quick and funds are generally deposited into investor’s bank accounts within one or two business days.
- Taxation: In India, long-term capital gains from money market funds are taxed at a lower rate than short-term gains. Tax benefits are available to investors who hold the units for more than three years, making these funds a tax-efficient investment option.
Conclusion
Money market funds in India work by pooling funds from different investors and investing these funds in various short-term debt instruments. Managed by professional managers, these funds strive to maintain its Net Asset Value (NAV). This relationship ensures that investors can purchase and redeem units at a fixed price, making it a viable option for temporary cash.
Disclaimer: Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
