Should you invest in money market mutual funds?

What is a money market fund and when and who should use this fund? - Nagarajan Ramanathan

What are money market mutual funds?
Money market funds are debt mutual funds that invest in short-term debt instruments, cash and cash equivalents that mature within a year. These funds provide a predictable rate of risk-free return because of their investments in high-quality assets. As a result, money market mutual funds are regarded as secure investments with little to no risk.

What do money market funds offer?
These funds typically provide a decent short-term income which is slightly higher than fixed deposits. This is because of their focus on maintaining a well-diversified portfolio of money market instruments. Investors having a short investment horizon of up to one year may consider these funds.

Money market funds might also potentially provide higher returns than a standard savings account, therefore those with a low risk tolerance and extra cash stashed in a savings account, you can also consider these.

But, should you invest in money market funds?
There are 16 different types of debt mutual funds, and we believe that liquid and short-duration funds are sufficient for a retail investor.

Liquid funds are good if your investment horizon is up to a year. These are low risk funds and can be used as emergency savings. They also charge relatively less for withdrawals.

If you want to invest for a longer period of time, you can choose a short-duration fund. These funds invest in debt instruments with a one- to three-year Macaulay duration.

The basic goal of investing in debt funds should be capital preservation, with some return optimisation thrown in for good measure. For this use, these two debt fund categories (liquid and short-duration funds) are adequate.

You can also look at funds especially handpicked by our team of researchers.

Suggested read: Should you invest in a single mutual fund scheme?

This article was originally published on December 30, 2022.