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What is Money Market Fund and Why to invest in them

It's an art to invest in. Investing so as not to lose money is a valuable talent. Not everyone is blessed with such talent. Nevertheless, saving your money to engage in the development of your economy (and contribute something to it) is quintessential (at least in recent times).

So how do you invest your money so you don't risk anything on the market? Investing in mutual funds is one way. Investing in mutual funds is a promise of safety and return. And it's always easier to go for money market funds among the mutual funds. There has hardly been an investor in these funds who have lost money!

What is a Money Market Fund

A money market fund is a form of mutual fund requiring investment in low-risk securities by law. Compared to other mutual funds, these funds have relatively low risks and pay dividends that generally reflect short-term interest rates. By comparison to a bank's "money market deposit account," though, money market funds are not federally insured.

Money market funds are primarily regulated under the Investment Company Act of 1940 and the rules adopted under the Act, in particular, Rule 2a-7.

How Money Market Funds give Returns

The portfolio of these funds is generally made up of government securities, highly-rated commercial papers, deposit certificates, and other low-risk money market securities. These funds typically invest in high liquidity securities. These funds are aimed at keeping the Net Asset Value (NAV) constant, which is the value you get when selling one unit of the fund. Yield is going to move up and down, however.

How Money Market Mutual Funds work

Money market mutual funds (MMMF) are used to manage the needs for short-run cash. It is an open-ended scheme that deals only with cash or cash equivalents in the category of debt funds. These securities have an average one-year maturity; this is why they are called the instruments of the money market.

The fund manager invests in liquid instruments of high quality such as Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Deposit Certificates. This fund aims to gain unitholders' interest. The main objective is to eliminate volatility in the Net Asset Value (NAV) of the investments.

Money market funds can be contrasted to a savings account consisting of a check facility, a lock-in facility and electronic transfer of money.

Additional Benefits of Investing in Money Market Mutual Funds

Money Market Mutual Funds are highly liquid. They can be converted to cash quickly. It's like a bank deposit. Most money-market funds have allowed check-writing facilities to make it look just like that. On your money market fund, you can write a check and pay for whatever you want. That's why they're a serious bank competition!

Types of Money Market Funds

Money-market funds are of many different types.

Treasure-only Funds:

These funds invest only in bills and treasury bonds from the government. This is the safest fund form.

Government-only Funds:

These funds invest in all forms of government securities including government agency debt.

Besides these, several funds are available, such as prime funds, first-tier funds, etc. Whatever the name may be, all these funds are of high quality and will promise to keep their NAV stable whatever happens to any economic sector.

Who should invest in Money Market Mutual Funds

The money market fund seeks to produce the highest degree of limited-term income by maintaining a well-diversified portfolio of money market resources. Investors can invest in these funds with a short investment horizon of up to one year.

Some investors with surplus cash and low-risk appetite in a savings bank account can invest in money market funds. Those investments will provide you with higher returns than your savings bank account. Businesses, as well as retail investors, could be the investors.

What should you know before investing in Money Market Mutual Funds

Risk

Such funds are influenced by interest rate risk, credit risk and the threat of reinvestment. In interest rate risk, the underlying asset prices are rising as interest rates are falling and decreasing as interest rates are rising. The fund manager may invest in risky securities that are more likely to default.

Return

You might get more benefit from a Money Market Fund than from a savings account. There is no guaranteed return, however. The Net Asset Value (NAV) fluctuates as the overall rate regime changes. A fall in interest rates can increase an underlying asset's prices and produce good returns.

Costs

The expense ratio refers to fees charged to manage your portfolio by Money Market Funds. Until recently, the maximum limit was set by SEBI at 1.05 percent. An ideal fund is one that maintains a lower expense ratio. When assets under management (AUM) grow, the scheme tends to lower operating costs.

Tax Liability

You are provided with taxable capital gains by investing in debt funds. The tax rate depends on the period of holding, i.e. how long you stayed in the fund. You're making a short-term capital gain (STCG) if you're staying invested for less than three years.

Long-term capital gains (LTCG) are made if you have been investing for more than three years. STCG will be added to your income from money market funds and taxed according to your income slab. Upon indexing, LTCG from money market funds is taxed at a rate of 20%.

Last Words

If you choose to use money market funds as an investment vehicle or as a temporary place to put money while waiting for the right product to purchase, make sure you know as much as possible about a particular fund, its features, its investment strategy, and how its costs relate to comparable vehicles. Money market funds are often reported to be the same as money. They aren't. There is no investment - nor would you want that to be.

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