Consider the following factors before investing in MMFs -
Money market funds are relatively less risky compared to other types of mutual funds. Still, certain risks associated with these funds are:
- Interest Rate Risk – It refers to the fluctuation in a fund’s NAV based on movement in market rates.
- Credit Risk – It refers to the risk of default, which occurs when issuers of money market instruments or fixed income securities fail to repay the debt.
- Reinvestment Risk – It refers to a situation where the fund manager is unable to reinvest earnings from a previous investment.
Money market mutual funds in India have the potential to provide higher returns than a savings account. However, the returns are not guaranteed. Changes in the overall interest rate regime can prompt a scheme’s NAV to fluctuate, which impacts investors’ returns.
Investors might want to check the past returns of a fund to figure out whether the scheme has been able to achieve its objectives consistently. But note that the past returns do not indicate whether or not the scheme will perform well in the future.
3. Expense Ratio
Asset Management Companies charge a certain fee known as expense ratio every year to cover the expenses incurred for operating the fund. The costs borne by the fund includes, administrative fees, distribution fees, advertisement expenses, fund managers’ fees, etc. The expense ratio directly impacts the annual returns of investors.
Hence, it is vital for individuals to compare the expense ratio of different money market funds before picking a scheme. That said, make sure to consider other aspects on this list as well to choose the right fund.
Money market funds are taxed akin to debt funds. Accordingly, if investors sell their units within 36 months, the returns are added to their annual income and taxed according to the slab rate. Conversely, the returns earned from the sale of units after 3 years from the date of purchase attract 20% tax post indexation.
5. Investment Horizon
Individuals should choose an MMF after deciding their investment horizon. In case investors are looking to invest their savings for a short duration, money market mutual fund schemes are certainly worth considering.
Money market funds, like any other investment avenue, involve their fair share of pros and cons. Investors must make sure to identify their financial goals besides gathering thorough knowledge of a preferred fund before investing.