What are money market mutual funds and why should you invest in them?

New Delhi: Money market funds are a category of debt mutual funds that allocate their investments to highly liquid money market instruments. This strategy aims to provide returns that typically outperform traditional term deposits.

These funds are well-suited for investors seeking to secure fixed returns within a relatively short time frame, typically ranging from three months to one year. Moreover, investors need not worry about incurring losses even if they choose to stay invested for periods longer than six months. In fact, these schemes often yield superior returns when compared to traditional term deposits.

According to AMFI data as of July 31, there are 23 schemes within this category, collectively managing assets worth ₹1,49,582 crore. Among the well-known money market funds in this category are:

• SBI Savings Fund
• HDFC Money Market Fund
• ICICI Prudential Money Market Fund
• Tata Money Market Fund
• ABSL Money Manager Fund

Money market instruments

The money market serves as a platform for the exchange of cash and cash equivalents. It encompasses a variety of financial instruments, including certificates of deposit, treasury bills, commercial papers, and repurchase agreements. Below, we provide concise descriptions of these instruments:

Certificates of Deposit (CDs): These represent a type of term deposit that lacks the option for early withdrawal. Unlike fixed deposits, CDs are negotiable instruments, allowing for specific arrangements between the involved parties.

Treasury Bills (T-Bills): T-Bills are government-issued securities designed to raise funds for periods up to one year. They are considered highly secure due to the sovereign guarantee backing them, but this safety typically translates to lower returns.

Commercial Paper: These are short-term, unsecured promissory notes issued by organizations with strong credit ratings. Commercial papers are issued at a discount, with redemption taking place at face value.

Repurchase Agreements (Repos): Repurchase agreements involve transactions between the Reserve Bank and commercial banks, as well as between two banks. In a repo, the borrower temporarily lends securities to the lender and agrees to repurchase them at a predetermined price.