Money Market Funds: Making Your Money Work Harder

By BankBazaar | March 1, 2017

Money Market Funds: Making Your Money Work Harder

Do you have excess cash stashed away in your regular bank Savings Account? Instead of earning a measly 4% interest that banks pay you for a Savings Account, you can get much more with Mutual Funds. Now, which ones give you that kind of interest in the short term? Money Market Funds, of course! These funds let you earn interest as high as 7%-7.5% per annum on your investment. Read on to know more about this lucrative investment option.

Additional Reading: Liquid Funds or Savings Accounts – The Liquid Funds Perspective

What are Money Market Funds?

Money market funds are Mutual Fund schemes that invest money in fixed-income securities, whose maturity is usually less than one year. These securities include treasury bills or T-bills, Commercial Papers (CP), Certificate of Deposits (CD), short-term Fixed Deposits and call money market securities. Most of these securities have a short maturity period which is typically less than 182 days. However, note that with effect from May 2009, the Securities Exchange Board of India (SEBI) has said that these funds cannot invest in securities where the maturity exceeds 91 days. As most of these securities are highly liquid, these funds are also known as Liquid Funds.

Can I withdraw freely from these funds?

You can withdraw your money in a day if you invest in Liquid Funds. However, note that most Liquid Funds have a lock-in of 3 days. There are some with a lock-in of a week or 15 days. There are very few funds that have a lock-in of a month. Note that the lock-in for Liquid Funds is much less than that of other funds.

What are the returns I can expect?

As you know, Mutual Funds do not give you guaranteed returns. This is because the returns generated by these funds depend on the price of the underlying securities and whether the fund manager trades in them. As prices change, the returns generated also change. However, on an average, the best Liquid Funds return about 7%-7.5% per year.

What about their expense ratio?

Usually, Liquid Funds have a very low expense ratio. So, it costs next to nothing to invest in these funds.

Any exit loads I need to pay?

The best part about Liquid Funds is that most of them don’t have an exit load. Even if there is an exit load, it will be very nominal.

What are the pros and cons of these funds?

Pros:

  • Higher returns than bank Fixed Deposits
  • Liquidity
  • Low expense ratio that ensures higher returns

Cons:

  • Reinvestment risk: This is the risk of getting lower returns on your investments once you have encashed them. So, there is the risk of you not getting the same returns from Liquid Funds once you have withdrawn your funds.
  • Taxation: You have to pay short-term capital gains tax on your investments if you sell them within 3 years and long-term capital gains tax if sold after 3 years. This might hit your returns. But note that dividends are tax-free in the hands of the investor.
  • High minimum investment requirements: Most Liquid Funds have set their minimum investment amount as Rs. 25,000. This can go as high as Rs. 1,00,000. So, these funds might make more sense for businesses and High Net worth Individuals (HNI).

Is it suitable for me?

If you have a large amount of money in your savings bank account and you need them in the short term, consider Liquid Funds. You can park your money for a short period and earn returns that are higher than your Savings Account. If you are looking at long-term investments, then you should consider other debt funds. Liquid Funds are strictly for the short-term.

How can you choose the best Liquid Funds?

Before investing in any Liquid Fund, check its ratings. Liquid Funds are rated by CRISIL based on several factors such as liquidity, volatility, mean return, and industry concentration. Choosing a fund with a good rating will ensure that your risks are minimised. The ratings are changed on a periodic basis. So, you can check to see if the fund has been doing well consistently.

Debt Mutual Funds are a good alternative to Fixed Deposits. Even though the risks might be a tad bit higher, the returns are much better than those from your Savings Account or Fixed Deposit. Don’t forget that dividends from Debt Mutual Funds are tax-free while interest on your Fixed Deposit is taxable.

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One thought on “Money Market Funds: Making Your Money Work Harder

  1. Anand Bhairat

    Hello,

    This is an execellant article.

    It lists outs the pros and cons of investing in Liquid Mutual Funds very clearly.

    I think the awareness of these products is low and the process of buying these funds is not very easy.

    Once, these bottlenecks are removed I am sure, more people will move their execess cash into liquid mutual funds.

    Anand Bhairat

    Reply

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