Money Market Mutual Funds (MMMF) predominantly invest in high-quality short-term debt instruments, cash, and cash equivalents. They are best suited for investors who are risk-averse with an investment horizon of three months to one year. Though they do not guarantee returns, they offer a predictable return usually considered risk free return due to the high-quality investments.
Money market mutual funds invest in securities that have a maturity of around one year. Hence they are used for managing short-term cash needs. The fund invests in certificate of deposits, commercial papers, treasury bills, and repurchase agreements. This is why these securities are called money market instruments. Money market instruments are highly liquid as they come with short maturities. They are highly secured as well, as the issuers of these instruments have a strong credit rating.
Individuals who have surplus cash in their bank account, and need stable growth rates with a horizon of one year can consider money market mutual funds as an option to invest. The returns from these funds may not be guaranteed but is often predictable. The return is also higher than bank deposits, hence allowing an investor to make money from the surplus cash.
Money market mutual funds do not suit all investors. There are certain things an investor has to consider before picking these funds to park the surplus money.
Considering all these, an investor has to decide whether MMMF is the best fit or not.
Typically, Money Market funds might charge an exit load if the money is withdrawn inside a week. With online access to mutual funds, small investors are taking advantage of investing in money market funds for the short term instead of holding cash in a savings bank account.
As money market funds do not earn very high returns, the expense ratio of the fund plays a very vital role in determining the earnings. Ideally, investing in lower expense ratio funds would be most efficient.
Taxation of Money Market funds is the same as that of debt funds. The tax rate depends on the duration for which the investment is held.
For an investment horizon of fewer than three years, the short term capital gains (STCG) are taxed as per the applicable income tax slab of the investor. While for investments beyond three years, the capital gains are considered as Long Term Capital Gains (LTCG) and are taxed at 20% with indexation.
Investing in money market instruments in India is beyond a retail investor’s reach. The minimum investment for these instruments is high. Money Market Mutual Funds allow retail investors to invest in such instruments with small investments. They are considered safe investments as the government, banks, and big corporations issue them. The return from these funds, though not entirely risk-free, is predictable. Independent agencies rate money market mutual funds, making it easy for investors to pick funds. Investors with surplus money can invest in these funds for short term needs.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.