Money Market Debt Funds – Definition and Should You Invest in Them?
Last Updated : June 29, 2020, 5:56 p.m.
There are various kinds of debt funds that invest in different debt instruments. There are funds that invest in short maturity funds and there are funds that invest in long maturity papers. The investment objective of all debt funds varies, so you should invest only after understanding the same. Money market funds are a kind of debt funds, let us know more about these.
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What are Money Market Debt Funds?
Money market funds are open-ended debt funds that invest in different kinds of debt securities such as treasury bills, commercial papers and certificates of deposit. These funds buy securities with short-term maturity ranging between three months to a year. In terms of fitment, these can be slotted between liquid funds and short term income funds in terms of risk and return profile.
Important Things to Know about Money Market Debt Funds
- Risk – Money market funds carry an interest rate, reinvestment and credit risk. However, these funds invest in the high rated securities and thus carry lower risk as compared to short-term income or long-term duration funds. Since the securities are also with a short term maturity, the risk reduces. However, the risk is higher than an overnight or a liquid fund.
- Volatility – Money market fund returns can be volatile basis the movement in interest rates. Volatility is higher than liquid funds but lesser than income and gilt funds.
- Return – These funds have the potential to deliver higher returns than liquid funds since the maturity profile is longer. Returns in these funds are higher in times when interest rates are reducing since it leads to higher prices of the underlying bonds. One can expect 2-3% higher returns over liquid funds in a falling interest rate scenario.
- Time Horizon – You can invest in these funds if your time horizon is between three months to a year. If your time horizon is between one to three years, we would recommend you invest in dynamic bond funds. To know the best dynamic bond funds, you can read another post of ours- https://www.wishfin.com/mutual-fund/five-best-performing-dynamic-bond-funds-to-invest-in/
- Taxation – Being a debt fund, money market funds are liable for debt fund taxation which is based on an individual’s tax slab. However, if you were to invest for three years, indexation benefit can be availed.
Should You Invest in Money Market Debt Funds?
Money market funds are suitable for individuals or corporates who intend to invest for a short period – three months to a year and are looking for better returns than a liquid fund. In a falling interest rate scenario, these funds can outperform liquid funds by 2-3%. If your time horizon is more than a year to about three years, you can invest in dynamic bond funds or short-term income funds. You need to be cognizant of the fact that these funds are not completely risk-free and do not guarantee returns. In a worst-case scenario, these funds will deliver returns in line with savings bank accounts. If you are looking for a safer option for a short-term period of up to a year, we recommend investing in liquid funds.
To know the best liquid funds to invest, you can read another post of ours- https://www.wishfin.com/mutual-fund/5-best-performing-liquid-funds-to-invest-in/