Mutual funds have nowadays become a standard choice for investments in India in the economic backdrop of falling interest rates on fixed deposits in banks, failing banks, good returns on mutual funds and ease of investing online through a mobile app on an Android device or iPhone. There are several different types of debt mutual funds one of the types we will discuss is the money market mutual fund. The money market mutual fund is an open ended mutual fund scheme which invests in safe and high quality liquid instruments such as treasury bills, commercial paper, certificate of deposits and repurchase agreements, that have a brief maturity period usually less than one year. Money market mutual funds managers try to earn interest for the unit holders with a primary goal at minimising the changes of the Net Asset Value (NAV) of the money market mutual fund. While most investors are aware of the changes in indices, they do not know that they can make their investments work for them by following these stock market indices even for debt funds.
A conservative saver reviewing a scheme for depositing money for up to a year, may consider investing in these money market mutual fund schemes. These funds give slightly enhanced yields than a savings bank account. However, if the duration of the investment is a much shorter period, an investor may ideally choose overnight funds or liquid funds. Corporates as well as individual fund investors, can invest in money market mutual funds. Mutual fund investors looking to invest in a somewhat longer period, may choose debt funds like dynamic bond funds or balanced funds which may offer an optimal portfolio and possibly superior returns. On top of that, there are no lock in periods, so investors can withdraw money from their money market funds.
The money market type of mutual fund scheme may be considered ideal for savers with slight tolerance for risk taking. They invest in instruments with short tenure, and are not very sensitive to interest rate changes in the Indian economy. Though money market mutual fund schemes are relatively safer, there are still risks associated with them which are common to all debt funds such as market risks, interest rate, issuer risk, credit risk, inflation risk, and liquidity risk.
While investing in the money market be sure to select a mutual fund house with a good record for managing debt mutual funds. Also check the fund to be sure that the funds portfolio manager is selecting only investments with short tenure and good credit ratings. Another point to keep in mind while investing in money market mutual funds is to be sure to discuss with your advisor about the expense ratio which is the ratio of the fee charged by the mutual fund house to manage your hard earned money. A savvy mutual fund advisor or distributor will recommend good quality funds with a low expense ratio and this is important since you will be earning only modest returns in the money market mutual fund.
From a taxation point of view keep in mind that money market mutual funds are similar to other debt mutual funds, and if kept for more than three years are eligible for long term capital gains tax through indexation. If money market debt funds are sold before three years, as an investor you will have to pay tax according to your tax bracket.
The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice or recommendations for types of money mutual fund schemes. This material is not an offer, solicitation or recommendation to purchase any financial products or services or money market mutual funds. Always remember that all investments, including money market mutual fund investments carry some level of risk, including the potential loss of principal invested.