Short-term cash requirements? Go for money market funds

Money market mutual funds (MMF) invest in high-quality short-term debt securities, cash, and cash equivalents. This is why money market mutual funds are regarded as safe with low-risk investments. Since these funds invest in high-quality assets, they provide a consistent risk-free rate of return. As per the value research data, the money market funds returns has given returns of 3.62%, 6.16%, and 6.46% over one, three, and five years.

The net asset value (NAV) fluctuates in response to changes in the interest rate regime as a whole. A decrease in interest rates may result in an increase in the price of an underlying asset and provide attractive returns. That said, returns, however, are not guaranteed.

What are the features of MMF?

Money market mutual funds (MMMFs) are a type of mutual fund designed to address short-term cash requirements. These are open-ended debt funds that invest exclusively in cash or cash equivalents. Money market securities typically have a one-year maturity, so they are referred to as money market instruments.

The fund manager invests in liquid securities of good quality like treasury bills (T-Bills), repurchase agreements (Repos), commercial papers, and certificates of deposit. Money market funds are primarily focused on generating interest for unitholders. The principal objective of money market funds is to reduce the fund’s net asset value (NAV) fluctuation.

How is it taxed?

Capital gains are taxable when you invest in debt funds. The tax rate is determined by the holding period or the length of time you invested in the fund. When you hold an investment for less than three years, you earn a Short-Term Capital Gain (STCG).

Long-term Capital Gains (LTCG) occurs when an investment is held for more than three years. STCG earned on money market funds is added to your income and taxed at your income slab. That said, long-term capital gains from money market funds are taxed at a flat rate of 20%.

Should you invest in money market mutual funds?

-A money market fund seeks to maximise short-term income by diversifying its holdings of money market products. These funds are appropriate for investors with a one-year investment horizon.
-Individuals with a limited tolerance for risk who have excess cash in a savings bank account can invest in money market funds. These funds have the potential to earn a better rate of return than a standard bank savings account.
-If your investing horizon is medium to long-term, a money market fund is not the best solution. Alternatively, you might invest in dynamic bond funds or balanced funds, which offer substantially greater returns.