Money Market Fund: Everything You Need To Know

What is Money Market Fund?

Investors with a limited capacity for risks are constantly searching for investment options that would offer them significant gains while preserving the liquidity of their investments. As a result, many debt funds have been developed with this aspect in consideration. Moreover, most investors constantly evaluate and compare the gains obtained through their bank investments with their debt fund investments. 

Money market funds have traditionally been the ideal option for such investors regarding short-duration debt investments. This article analyzes and reviews the many money market fund types available in India, their advantages, and other factors associated with money market mutual funds in India.

What is a Money Market Fund Meaning?

Money market funds try to put money into short-term, highly liquid securities. These assets include cash, cash equivalents, and debt-based derivatives with a short maturity with a good credit rating (such as U.S. Treasuries). Money market funds try to offer investors significant liquidity and minimal risk. Money market mutual funds are another name for money market funds.

A money market fund and a money market account are not the same, despite their names being similar (MMA). For example, an investment supported by an investment fund firm is known as a money market fund. As a result, there is no leading assurance. On the other hand, an interest-bearing savings account is referred to as a money market account. 

Financial organizations provide money market accounts. However, they usually have few transaction rights guaranteed by the Federal Deposit Insurance Corporation (FDIC).

Money Market Fund Types

Depending on the category of financial capital, the maturity term, and other characteristics, money market funds are divided into several categories. These categories have been discussed below:

Prime Money Fund

Commercial documents and changing debt rates of non-Treasury assets, such as those issued by companies, U.S. government agencies, and government-sponsored enterprises, are the investments made by prime money funds.

Government Money Fund

A government fund must hold at least 99.5% of its investments in cash, government bonds, and fully-collateralized repurchase agreements.

Treasury Fund

An investment in Treasury assets and resources, like Treasury bills, bonds, and bills notes, is made via a Treasury fund.

Tax-Exempt Money Fund

Returns from tax-exempt money market funds are excluded from federal income tax in the United States. A fund exempt from federal income taxes may also be free from state income taxes based on the specific securities it invests in. Such money market funds are typically composed of municipal bonds and other debt instruments.

Some money market funds have high minimum investment requirements (typically $1 million) to attract institutional capital. However, due to their low minimum standards, additional money market mutual funds in India are available to individual investors as retail funds.

Who Should You Get Involved With Money Market Funds?

These schemes are ideal for investors looking out for minimum capacity for risks and an objective of up to a year as they get involved with securities of the money market. 

Choosing these options for investments often offers individuals with unproductive funds being kept in their accounts. Therefore, it is essential to highlight that people with immediate unrequired shorter financial surpluses are recommended to use this money.

Money Market Funds Benefits

Given below are the benefits of money market funds in India are as follows:

Stability

The least volatile category of fund investing is money market mutual funds.

Liquidity

You may easily withdraw money using a money market mutual fund or settle deals in other investments via your brokerage account since assets are often accessible by the following day.

Safety

The funds are less susceptible to market changes than many other forms of investments since they are mandated by federal requirements to invest in low-risk securities for short-termed maturity periods.

Short Duration

Money market mutual funds often experience fewer interest disadvantages than long-maturing fund investments in bonds because their duration is so short—at most, a few months.

Diversensess

Money market mutual funds typically hold a variety of assets, with little exposure to any one issuer outside of U.S. Treasury funds.

Possible Tax Benefits

Several money market funds may be a source of steady, tax-efficient income since they invest in assets whose payments of interest are generally free from central government and, in a few cases, state income taxes.

Money Market Fund Risks

The risks associated with money market funds in India are mentioned below:

Credit Danger

Although money market mutual funds get involved in good-quality resources and assets while attempting to maintain the worth of your investment, there is a risk that you can fail to keep track of your investments. 

No assurance would be there to gain 1 USD for every share you own when you claim back your shareholdings, unlike standard bank certificates of deposit (CDs) or savings accounts secured by the Federal Deposit Insurance Corporation (FDIC).

Expenditure Risk

Money market mutual funds' earnings are typically lesser than significantly volatile assets like standard bond and stock-based fund options because of the security and short-term character of the underlying investments, which increases the certainty that the return rates may not sustain inflation.

Foreign Interaction

Adverse regulations and political, market, or economic changes in other nations may impact entities there.

Exposure To Financial Services

Economic downturns, changes in the rates applicable for interest, and government restrictions may all significantly harm financial service issuers, affecting things like asset value or their capacity to make payments.

Availability Risk

If the fund's liquidity falls below necessary minimums due to market circumstances or other causes, the fund may charge a fee or temporarily limit you to trade shares.

Price Issue

Your shares can be worth more or less when you sell them since the fund's share price will change from time to time.

Considerations Before Purchasing Money Market Funds in India

Prior to investing in money market funds in India, consider the following critical aspects for your investments:

Returns and Risks

Money market mutual funds are often considered to be debt funds. Also, they are liable for all the risks related to those investments, including the credit risk and rate of interest. However, the fund manager can also get involved with options with a more significant level of risk tolerance to boost returns. 

As a result, money market mutual funds in India often offer better outcomes than a typical savings bank account. The moment the rate of interest regime changes, so does the NAV (Net Asset Value) of these funds.

Cost Ratio

The ratio for expenses is essential in estimating your money market fund gains since the outcomes are low. Moreover, this ratio is a minimal section of all the fund assets the concerned authorities charge for their resources and services.

To optimize your revenue, you are advised to seek funds that have lower cost ratios.

Invest in Line With Your Investment Strategy

Money market funds are often recommended for people with a 90 to 365 days investment period. The investment schemes may assist you in obtaining a diversified portfolio. These also can assist you in adequately distributing and investing extra funds. However, do ensure that you invest based on your investment approach.

Taxation For Money Market Funds in India

The tax regulations applicable to money market funds have been mentioned below:

Tax on Capital Gains

If you maintain the plan's assets for up to three years, your earnings are referred to as short-term investment income. The STCG (Short Term Capital Gain) increases your tax liability and is added to your taxes in the applicable tax bracket.

Tax on Long-Term Capital Gains

If you possess plan units for more than three years, you generate long-term capital gains, also referred to as. LTCG is taxable at an amount of 20% with annual inflation benefits.

Conclusion

Money market funds are now one of the fundamental foundations of modern capital markets. They provide a diversified, well-managed portfolio with high daily liquidity for clients. Moreover, money market mutual funds are popular among investors as a safe place for their funds while they decide on other investments or to cover any immediate liquidity requirements.

Frequently Asked Questions - FAQs

Do money market funds need taxation?

Depending on the securities the fund invests in, its income is either taxable or tax-exempt. An example of a fixed-income mutual fund that invests in debt securities is the money market mutual fund, distinguished by its investments' short maturities and low credit risk.

How much time should money be kept in a money market fund?

The amount of money that should be held in funds in these sorts of accounts for unanticipated crises and life events is often advised to be six to twelve months' worth of living costs. The money is sitting there after that, dropping in value.

Money market funds: Are they risk-free?

Money market mutual funds and accounts are both entirely secure. Banks invest funds from MMAs in liquid, short-term, stable assets with minimal risk. Money market funds make investments in short-term, comparatively secure securities that expire in around 13 months on average.

Money Market Funds: Are They Safe?

Yes. With a target share price of $1, money market funds are often one of the safest financial investments. Only a few times (usually during financial crises) have money market funds fallen below this amount or "broken the buck," and they have always recovered fast.

Are Money Market Funds and Money Market Accounts the Same Thing?

No. A mutual fund investment known as a money market mutual fund contains short-term treasuries and other money market securities. A money market account is an investment option that pays interest to depositors.