We will discuss what are money market mutual funds.

The Story

In November, Money Market Mutual Funds have seen inflows of ₹2426 crores.

In terms of Assets Under Management (AUM)—the total market value of all the investments managed by the fund, the Money Market fund has the second highest AUM in Debt Oriented Schemes after liquid funds.

We have already talked about liquid funds in one of our previous newsletters, today, we will deep dive into the money market funds.

What are money market funds?

Governments and corporations often raise funds using debt instruments to meet their short-term operational needs by issuing:

  • Treasury bills—issued by the RBI on behalf of the government
  • Certificates of deposit—issued by scheduled commercial banks
  • Commercial paper—issued by corporates

These instruments often trade in the money market—which is a market for highly liquid and low-risk assets.

Money market mutual funds invest in these short-term, low-risk financial instruments, offering a safe and low-risk option for investors seeking short-term returns.

Most important features of money market funds

1. Lowest Risk among mutual funds categories
Money market funds are one of the lowest-risk investments across mutual fund categories, providing stability to park short-term funds.

2. Better Returns than a Savings Account
Money market funds often give slightly better returns than a regular savings and deposit account while being almost as safe, with no lock-in and exit load.

What makes money market instruments safer?

Money market instruments have maturities of only up to twelve months.

It significantly reduces the risk of price fluctuations, and are typically issued by highly creditworthy entities like governments or large corporations, minimizing the risk of default.

Historical drawdown of money market mutual fund

Kotak Money Market Fund, being the oldest in the category, serves as a good sample for analyzing historical drawdowns of money market funds.

Though most of the time, it has delivered positive returns, Kotak money market funds’ worst performance came majorly during the COVID-19 led lockdown.

Interestingly, even in its weakest quarter and year, the fund managed to provide positive returns, aligning with its goal as a low-risk investment choice.

To Conclude

Low risk, high liquidity, and steady performance, even during uncertain times, make money market funds a considerable alternative for investors looking to park their short-term surplus funds securely while earning slightly better returns than a traditional savings account.