An open-ended debt scheme, in which the fund manager invests in money market instruments such as treasury bills and commercial papers which are highly liquid and have short-term maturities. These are issued by the RBI with the help of commercial banks having a maturity period of up to 1 year.
The easiness of an asset to be converted into cash equivalent indicates its liquidity. Money market fund schemes invest in short term securities that gives high liquidity.
These instruments are supported by strong credit ratings which reduces credit risk. Though these funds invest in short-term instruments, the interest rate risk is on the lower side.
The volatility in such instruments is largely on the lower side due to short-term duration. These funds can stabilize any investment portfolio.
Sensible investing in money market mutual funds
1. Deploying the surplus funds one owes, rather than keeping them idle, it is advisable to invest in money market mutual funds.
2. Create an emergency fund as liquidity is utmost important. Money market mutual funds are considered for parking for emergency corpus.
3. An alternate for the short term avenue such as F.D. ‘s etc. for their ability to generate comparatively better returns.
Credit risk: Unlike typical bank certificates of deposit, they invest in high-quality securities and seek to preserve the value of investment.
Inflation risk: Keeping in mind the safety and short-term nature of the underlying investments, their returns tend to be lower than those of more volatile investments which may not keep pace with inflation.