Money Market Funds: Types, Benefits & Returns

What Is the Meaning of Money Market Funds?

What Are the Types of Money Market Instruments in India?

 

Here are the different types of money market instruments in detail:

Types of Money Market Funds

Details

Treasury bills

The Government of India issues such financial instruments for raising funds. The maturity period of these securities can be up to 365 days. Since T-bills are government-backed, they do not involve any financial risk. For the same reason, they offer the least returns in comparison to other money market instruments.

Repurchase agreement or Repo

It refers to short duration loans that both buyers and sellers agree upon for selling and repurchasing. Note that such transactions can only involve the Reserve Bank of India and third parties that have approval.

Certificate of deposit

This refers to a term deposit offered by commercial banks, which cannot be redeemed before the completion of the maturity period.

Commercial paper

These are short-term promissory notes issued by companies and financial institutions with high credit ratings. Generally speaking, such unsecured financial instruments are issued at a discounted rate and redeemed at face value.

Banker’s acceptance

Banker’s acceptance is a document, wherein commercial banks guarantee to make payment in the future. It includes all essential details of the repayment, including the repayment date, the amount due, etc. The maturity period of this money market instrument ranges from 30 to a maximum of 180 days.

Commercial bills

Such financial securities are similar to bills of exchange. Usually, businesses issue such money market instruments for raising funds to fulfil short term financial requirements.

Call and notice money

Call money refers to that area of the money market, wherein commercial cooperative banks offer or borrow funds immediately. That said, in the notice segment, these entities borrow/lend for a period of not more than 14 days. The interest rates depend on the market scenario. Accordingly, a change in demand and supply has a significant effect on them.

How Do Money Market Funds Work?

Benefits and Drawbacks of Money Market Funds

 

The benefits and drawbacks of money market mutual funds or MMFs are as follows:

Benefits of MMF

Drawbacks of MMF

An MMF is a safer option than most debt schemes for parking money as investments are subject to low/moderate risk

Investments in MMFs may weaken the purchasing power of individuals during inflation.

Provides investors with easy access to money market instruments.

Sensitive to interest rate fluctuation and monetary policy.

Have the potential to generate stable returns

A high expense ratio impacts investors’ annual returns

Offer high liquidity to investors

The rate of return is usually lower than various other types of debt funds.

Returns from Money Market Funds

 

With money market instruments, the returns are stable with a lower risk. Over a period of 5 year, one can expect returns between 6 - 7%. Mentioned below are some of the best money market funds along with their 5 years returns.

[1]

Mutual Fund Names

5 Years Returns

Edelweiss Money Market Fund

6.16%

L&T Money Market Fund

6.35%

Aditya Birla Sun Life Money Manager Fund

6.70%

SBI Savings Fund

6.10%

UTI Money Market Fund

6.51%

Who Should Invest in Money Market Funds?

How to Invest in Money Market Funds?

Things to Consider Before Investing in Money Market Funds

Frequently Asked Questions