Money market funds fall into the category of debt mutual funds that primarily invest their assets in highly liquid instruments such as cash and cash equivalents. These funds provide investors with a combination of high liquidity and a low level of risk.
It’s important to note that while money market funds offer security comparable to cash, they are not entirely as safe as cash. Nevertheless, their risk level remains extremely low.
Money market funds are particularly suitable for short-term investments. Investors often utilize these funds as a temporary parking place for their funds while they make decisions regarding their ultimate investment destination.
Therefore, long-term investment in money market funds is not recommended.
Here are several reasons why investing in money market funds can be advantageous:
- Regular Income: One of the primary purposes of investing in money market funds is to generate income and ensure a steady cash flow, rather than focusing on capital appreciation.
- Short-Term Investment: These funds are well-suited for short-term investments. Investors with a long-term horizon may consider money market funds as a temporary solution until they identify more permanent investment opportunities.
- Low Risk: Due to their extremely low-risk nature, money market funds are an attractive choice for investors with a low-risk tolerance.
Key money market instruments that money market funds invest in include treasury bills (T-bills), certificates of deposit, repurchase agreements, and commercial papers.
- Treasury Bills (T-bills): These are short-term government-issued promissory notes that guarantee repayment at a later date. T-bills serve as short-term borrowing instruments.
- Certificates of Deposit: These fixed-income financial instruments are regulated by the Reserve Bank of India (RBI), and the withdrawal amount is guaranteed from the outset. They can be issued by financial institutions or commercial banks.
- Repurchase Agreements: A repurchase agreement involves a borrower lending a security to a lender in exchange for cash, with an agreement to repurchase it after a short period at a predetermined price.
- Commercial Papers: These are unsecured, short-term debt instruments typically issued by companies to meet short-term financial obligations.
When considering the top-performing money market funds, it’s important to note that most money market funds tend to provide similar returns. However, a select few mutual funds have managed to achieve returns ranging from 7% to 7.5% over the past year.
Notably, only two schemes outperformed the benchmark index in the past year: Aditya Birla Sun Life Money Manager Fund and UTI Money Market Fund.
Other high-performing money market funds include Axis Money Market Fund, HDFC Money Market Fund, and Franklin India Money Market Fund.
