Money Market Funds: Meaning, Features, Categories, Benefits, Risk Involved

Published on March 13, 2026 | 3 min read

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Money market funds are mutual fund schemes which invest in short-term debt instruments like treasury bills, commercial papers, and certificates of deposit. If you are someone looking to park surplus cash without taking much risk, these funds can be considered as suitable options.

Key Takeaways:

Money market funds invest in short-term, low-risk debt instruments.
These funds invest in securities which have a maturity ranging from one day to 365 days.
These funds have high liquidity, which means you can redeem them anytime as per your needs.
Returns are low compared to equity funds, but suitable for investors willing to invest in low-risk funds.

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What is a money market?

A money market is that segment of the financial market where short-term borrowing and lending take place. This segment deals with instruments that have a maturity period ranging from overnight (one day) to one year.

The money market plays a crucial role in the overall financial system, facilitating liquidity management for institutions and offering platforms for government, corporations, and financial institutions to meet their short-term funding needs.

What are money market funds?

Money market funds are the type of mutual funds that allocate their assets in the short-term and low-risk financial instruments such as treasury bills, commercial papers, and certificates of deposit.

These mutual funds are considered safer investment options for short-term savings goals, as they offer high liquidity and the potential for higher returns than traditional investments.

These mutual funds are subject to SEBI regulations mandating that they invest at least 10% of assets under management (AUM) in highly liquid assets that mature daily and 30% of holdings in assets that mature weekly.

Key Features of Money Market Funds

Here are the key features of money market mutual fund schemes:

High Liquidity

Money market funds are highly liquid because they invest in short-term financial securities.

Low Risk

These funds are less risky compared to diversified equity funds.

Maturity

These funds had maturity ranging from 1 day to 365 days.

Regulated

These funds are regulated by the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI).

Moderate Returns

Money market funds provide higher returns compared to traditional short-term savings deposits.

Categories of Money Market Funds

Money market funds are categorised into several sub-categories based on SEBI’s mutual funds circular. Here are the categories are as follows:

Overnight Funds

These funds invest in instruments that mature overnight.

Liquid Funds

These funds invest in instruments that mature in less than 91 days.

Ultra-short Duration Funds

These funds invest in instruments with a maturity ranging from 3 to 6 months.

Low Duration Funds

These funds invest in instruments with a maturity ranging from 6 to 12 months.

Benefits of Investing in Money Market Mutual Funds

Here are a few benefits of investing in money market mutual funds:

Stable Returns

The returns of these funds are quite stable because they invest in short-term debt instruments.

Low Risk

These funds are less risky and less volatile compared to other diversified funds.

Security

These funds are highly regulated by SEBI and mandated to invest only in low-risk securities.

Less impact of Interest Rate

Compared to long-term bond funds, money market funds are less impacted by changes in interest rates.

Risk Involved in Investing in Money Market Funds

Money market funds contain certain risks that need to be considered before investing:

Credit Risk

If an issuer of debt instruments held by the funds fails to meet its obligations, the risk of default increases, which can negatively affect the fund.

Interest Rate Risk

Although money market funds are less impacted by changes in interest rates, risk is still present.

Reinvestment Risk

These funds keep on investing in new instruments because old ones mature. If reinvestment happens at lower interest rates, it may affect the overall yield of the fund.

Who should invest in money market mutual funds?

Money market funds invest in short-duration debt instruments, which can be a good fit for certain types of investors. These include:

Investors looking for safety, liquidity and moderate returns on their surplus cash.
These types of mutual funds are also best suited for individual investors or businesses with a short-term investment horizon who need quick access to their funds without the risk of significant loss.
Conservative investors with low-risk appetites can also invest in money market funds to generate stable returns.

Money market funds invest in short-term financial instruments like T-bills, commercial paper and certificates of deposits, which makes it ideal for investors looking to invest their surplus cash.

Returns may be relatively low compared to other long-term debt funds or equity funds, but these funds usually provide higher returns than traditional savings deposits.

About Author

Subhasish Mandal

Sub-Editor

Finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.

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