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How Money Market Funds Works?

Debt mutual funds are suitable for those investors who do not like taking risks and want to protect their capital against the volatility of the equity market. Debt mutual funds are sub-divided into different types of funds based on the asset allocation of the fund and the average maturity of the underlying assets. You can opt for short term or long term debt funds depending on your investment needs.

One type of debt mutual fund is the money market fund. As the name suggests, money market funds invest in securities of the money market. These securities are highly liquid as they are frequently traded by investors. Moreover, money market securities have the maximum maturity period of one year which increases their liquidity. Money market mutual funds are those which invest in such short-term money market instruments. These funds are, therefore, marked by two distinctive features – liquidity and short term maturity.

Features of money market funds

Money market funds have the following features –

  • They invest in money market instruments like commercial paper, treasury bills, certificates of deposits, corporate bonds, etc. 
  • They are liquid and suitable for investors who are looking for a short term investment avenue
  • Money market funds have low risk and provide stable returns

How do money market funds work?

The money that you invest in money market funds is pooled into a corpus and then invested in money market securities. According to SEBI’s norms, money market funds invest in securities which have maximum investment duration of one year. Since money market securities are debt instruments, they pay a guaranteed rate of interest which is the source of earnings for investors. The interest earned on the underlying assets helps in providing capital returns to investors. Moreover, top money market funds also aim at capital appreciation by banking on the interest rate movement in the market. When there is a fall in the interest rates, money market funds reallocate their investments to securities with a high tenure. This increases the fund value. On the other hand, if the interest rates rise, the fund tries to invest in short term instruments to minimise capital losses. Thus, by changing the fund allocation in accordance with interest rate movements, money market funds try to provide capital appreciation to their investors.

Money market fund benefits

There are different money market fund benefits which you can avail if you choose to invest in these funds. These benefits are as follows –

  • Liquidity 

Money market instruments are highly liquid and since money market funds invest in these instruments, they also become highly liquid. So, if you are looking to park your surplus cash for a limited time, you can invest in money market funds and redeem the fund instantly whenever needed.

  • Limited interest rate risks

The risk with debt mutual funds is primarily interest rate risks. This risk increases with higher maturity funds. Since money market funds invest in instruments with a low maturity period, they have minimal interest rate risk and can offer good returns even if the interest rate is fluctuating in the market.

  • No volatility risk

Being a type of debt fund, money market funds do not invest in equity. They invest only in debt instruments which provide a guaranteed rate of return on investments. As such, money market funds have no volatility risks and are suitable for investors who are risk-averse and want capital protection.

  • Ease of choosing STP

STP (Systematic Transfer Plan) is a process by which you can invest in equity in a systematic manner rather than at once. You can invest in the top money market funds and choose the STP feature to allocate your investments to equity at regular intervals. 

Investing in money market funds

To avail money market fund benefits and to invest in the best funds, you can choose is an online personal finance platform which allows you to invest in the top money market funds of India with some simple clicks of the button. No commission or fee is involved in buying through and you can buy online in a paperless way too. So, if you are looking for a short term investment avenue which is also liquid, choose money market funds and invest in the best funds through for ease and convenience. 


Published by Nidhi Mehra

I am blogger with 5 years of experience in writing articles and topics related to finance and funds

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