- The Best Money Market Mutual Funds
- What Is A Money Market Fund
- When Are Money Market Funds A Good Option?
- The Best Money Market Funds
- I Focused On Money Market Funds With Low Costs and High Returns
- Money Market Mutual Funds : Basics, Types, Benefits and More
- 2. Types of Money Market Instruments
- 3. Who should Invest in Money Market Mutual Funds?
- 4. Things to Consider as an Investor
- 5. How to Invest in Money Market Mutual Funds?
- Money Market (Definition, Example) | Top 5 Instruments
- #1 – Call Money
- #2 – Treasury Bills
- #3 – Commercial Papers (CPs)
- #4 – Certificate of Deposits (CDs)
- #5 – Repos
- Money Market Funds
- Recommended Articles
- Money Market mutual fund
- What is Money Market mutual fund?
- Purpose of Money Market Mutual Funds:
- How do Money Market Mutual Funds work?
- Types of Money Market Mutual Funds:
- Certificate of deposit:
- Commercial papers:
- Advantages of Money Market mutual fund:
- Special Features of Money Market Mutual Funds
The Best Money Market Mutual Funds
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If you are looking to earn more from your cash holdings, money market mutual funds might be the perfect place to invest your cash.
You’ve ly heard of money market accounts and high-yield savings accounts (both are FDIC insured). The lesser known money market mutual fund (which is not FDIC insured) more than holds its own when it comes to a safe place to hold your money, while earning interest.
What Is A Money Market Fund
A money market mutual fund, often referred to as a ‘money market fund’, is a low-risk investment with the goal of earning interest while still providing liquidity.
Money market funds were developed in the 1970s before bank money market accounts were allowed.
A money market fund is typically invested in short-term high-quality debt products, making it less risky than a mutual fund invested in stocks or longer term bonds.
Money market funds can be categorized into three groups: Prime, Government and Tax-free. Prime money market funds are typically invested in short-term corporate and bank debt securities. Government money market funds have at least 99.
5% invested in government backed securities, making them extremely safe investments.
Finally, tax-free money market funds are invested primarily in debt obligations issued by municipalities or other entities whose interest is federally tax-exempt.
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When Are Money Market Funds A Good Option?
Money market funds can be effective additions to investment portfolios in need of high liquidity with a low tolerance for losses. Liquidity simply refers to how easy it is to convert the investment into cash.
For example, an investment property has much less liquidity than a savings account, since it would ly require at least a couple of months to sell the property and get the cash. A savings account on the other hand is highly liquid, since a quick trip to the bank is all you need to retrieve your cash.
Money market funds offer high liquidity compared to other instruments with similar expected returns, CD’s and treasury bills, while still being relatively low risk.
You must typically hold a CD until its full maturity date to avoid paying an early withdrawal penalty. Treasury bills also have specific maturity dates.
Money market funds, however, don’t have a set shelf life and can be liquidated on-demand when the cash is needed.
If this sounds similar to banks’ high-yield savings accounts or money market accounts, it is.
The largest difference lies in the ability for yields on money market mutual funds to rise proportionately with interest rates.
For example, as interest rates have risen, the yields on most bank money market accounts (which are set by the banks themselves) have stayed relatively flat, while money market mutual fund yields have increased.
This makes money market mutual funds a good place to hold cash and earn some interest. That’s particularly true when you know you have an upcoming big ticket purchase and you need the cash on hand.
One example might be when you have saved up a down payment for your first home and are simply waiting to find the perfect house.
The stock market might be too risky since you want to buy the house soon and market volatility could eat up some of your investment.
Yet the balance is large enough that you don’t want to miss out on earning interest by just having it sit in a conventional saving, or worse, checking account.
The Best Money Market Funds
The best money market funds will offer a combination of low risk, high yields, and low expenses. To make my selection, I combed through the list of money market mutual funds at MutualFunds.com and identified the money market mutual funds with the highest yields and lowest expenses with a minimum investment size of $1,000,000 or lower.
I came up with a short list of 15 different money market mutual funds, which you can see in the table below (sorted by their 7-Day yield).
|Fund Name||Fund Ticker||Min. Investment||Expense Ratio||7-Day Yield|
|Invesco Premier Portfolio||IMRXX||$1,000||0.18%||2.42%|
|Vanguard Prime Money Market||VMMXX||$3,000||0.16%||2.38%|
|Federated Prime Cash Obl.||PCOXX||$500,000||0.20%||2.39%|
|Schwab Value Adv. Money||SNAXX||$1,000,000||0.19%||2.37%|
|Fidelity Money Market Portfolio||FMPXX||$1,000,000||0.18%||2.41%|
|Fidelity Money Market Prime||FDIXX||$1,000,000||0.23%||2.30%|
|Fidelity Money Market Prime||FIDXX||$1,000,000||0.18%||2.38%|
|Pimco Gvmt. Money Market||PGFXX||$1,000,000||0.18%||2.30%|
|Wells Cash Inv. Money Market||WFAXX||$1,000,000||0.33%||2.25%|
|Vanguard Treasury Money Mkt||VUSXX||$50,000||0.09%||2.32%|
|Fidelity Money Market||FCIXX||$1,000,000||0.33%||2.23%|
|Vanguard Federal Money Mkt.||VMFXX||$3,000||0.11%||2.31%|
|Fidelity Money Mkt. Prime||FDOXX||$1,000,000||0.33%||2.20%|
|JPMorgan Prime Money Mkt.||VPMXX||$1,000,000||0.45%||2.18%|
|Fidelity Money Money Market||SPRXX||$0||0.42%||2.17%|
When selecting a fund, you’ll want to make sure you can make the minimum investment size.
It’s also important to understand the investments within the money market fund to make sure you’re comfortable with the underlying investments.
Remember that when it comes to any kind of investment, past performance is NOT an indicator for future performance. Just as with any other investment, you’ll want to research carefully before making a decision.
I Focused On Money Market Funds With Low Costs and High Returns
When comparing money market mutual funds a few patterns arose. First, when it comes to expense ratios, or the annual fees you’ll pay to own the funds, 0.
25% is a threshold that separates the top and bottom half of the money market mutual funds in my short list. When it comes to yields, 2.1% is a defining 7-Day Yield threshold. For YTD yields, 1.
4% is a benchmark that separates the pack.
So which funds have expense ratios lower than 0.25%, 7-Day Yields higher than 2.1% and YTD yields higher than 1.4%? Let’s find out.
As you can see in the charts above, there are four money market mutual funds which meet this criteria. These four money market funds are: IMRXX, VMMX, FMPXX and FIDXX.
Looking closer we see that if you can meet the $3,000 minimum investment size, Vanguard’s VMMXX offers an appealing combination of relatively high returns with low expenses.
If you don’t have a large amount of cash to invest, you should note that both FMPXX and FIDXX have $1MM investment minimums.
If you have less than $1,000, SPRXX doesn’t meet the yield and expense ratio thresholds we laid out, but it doesn’t have an investment minimum.
Deciding which money market mutual fund is right for you is important, but this should give you some food for thought, and help you get started as you begin your search.
Remember that the benefits of a money market fund are the liquidity they provide while maintaining interest rates which are better than you’d find in a traditional savings account or money market account.
Also keep in mind that yields change daily.
If you’ve rather stick with FDIC insured bank money market accounts, consider using an online savings account which may offer a higher rate than your local bank.
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Money Market Mutual Funds : Basics, Types, Benefits and More
Money market mutual funds (MMF) invest in short-term debt instruments, cash, and cash equivalents that are rated high quality. It is for this reason that money market mutual funds are considered safe or investment with minimal to low risk. As these funds invest in high-quality instruments, they offer a predictable risk-free return rate.
Money market mutual funds (MMMF) are used to manage short-term cash needs. These funds are open-ended in the debt fund category and deal only in cash or cash equivalents. Money market securities have an average maturity of one-year; that is why these are termed as money market instruments.
The fund manager invests in high-quality liquid instruments such as treasury bills (T-Bills), repurchase agreements (Repos), commercial papers, and certificates of deposit. Money market funds mainly target earning interest for the unitholders. The primary aim of money market funds is to minimise the fluctuation of the Net Asset Value (NAV) of the fund.
2. Types of Money Market Instruments
Following are the most popular money market instruments:
a. Certificate of Deposit (CD)
These are time deposits such as fixed deposits that are offered by scheduled commercial banks. The only difference between FD and CD is that investors are not allowed to withdraw CD until maturity.
b. Commercial Paper (CPs)
These are issued by companies and financial institutions which have a high credit rating. Commercial papers are also known as promissory notes, commercial papers are unsecured instruments, which are issued at the discounted rate and redeemed at face value.
c. Treasury Bills (T-bills)
T-bills are issued by the Government of India to raise money for a short-term of up to 365 days. Treasury bills are considered one of the safest instruments as the government backs these. The rate of return, also known as the risk-free rate, is low on T-bills as compared to all other instruments.
d. Repurchase Agreements (Repos)
It is an agreement under which RBI lends money to commercial banks. It involves the sale and purchase of agreement at the same time.
3. Who should Invest in Money Market Mutual Funds?
A money market fund tries to offer the highest short-term income by maintaining a well-diversified portfolio of money market instruments. Investors having a short investment horizon of up to one year may invest in these funds.
Those individuals with low-risk appetite having their surplus cash parked in a savings bank account can invest in money market funds. These funds have the potential to offer higher returns than a regular savings bank account. The investors could be corporate as well as retail investors.
If you have a medium to long-term investment horizon, then money market fund won’t be an ideal option. Instead, you may go for dynamic bond funds or balanced funds, which are capable of providing relatively higher returns.
4. Things to Consider as an Investor
Money market funds face interest rate risk, credit risk, and reinvestment risk. In interest rate risk, the prices of the underlying asset increases as interest rates decline and decrease as interest rates rise. The fund manager may invest in risky securities which have a higher probability of default.
Money market funds have the potential to offer higher returns than a regular savings bank account. However, the returns are not guaranteed. The Net asset value (NAV) fluctuates with changes in the overall interest rate regime. A fall in interest rates may increase the prices of an underlying asset and deliver good returns.
Expense ratio refers to the fee charged by fund houses to manage your investment. SEBI has capped the expense ratio at 1.05%. As the assets under management (AUM) increases, the scheme tends to reduce the cost of operations.
d. Investment Horizon
Money market funds are suitable for very short-term to short-term investment horizons, i.e. three months to one year. For medium-term horizons, you may invest in other debt funds dynamic bond funds.
e. Financial Goals
If you have to make EMI payments or invest extra cash while maintaining liquidity, then you can use money market funds. A small portion of your portfolio can be invested in these for diversification.
f. Tax on Gains
Investing in debt funds provides you with taxable capital gains. The tax rate depends on the holding period, i.e. for how long you stayed invested in the fund. You make a Short-term Capital Gain (STCG) when you stay invested for a period of fewer than three years.
Long-term Capital Gains (LTCG) are made when you stay invested for over three years. STCG from money market funds are added to your income and taxed according to your income slab. LTCG from money market funds is taxed at the flat rate of 20% after indexation.
5. How to Invest in Money Market Mutual Funds?
You can invest in money market funds with ClearTax in a hassle-free and paperless manner by following the below-mentioned steps:
Step 1: Register for an investment account by logging on to https://cleartax.in/save
Step 2: Enter the details requested
Step 3: Complete your KYC, the whole process can be completed within five minutes
Step 4: Choose and invest in the most suitable money market fund
Money Market (Definition, Example) | Top 5 Instruments
Money Market is a market where short-term and open-ended funds are traded between institutions and traders; where the borrower can easily meet with fund requirements through any financial assets which can be easily converted into money, providing a high amount of liquidity and transferability to an organization.
- The money market is a fixed income market which means it deals in financial instruments that pay a fixed rate on the investment. This is the opposite of the capital markets where there is no fixed return on investments.
- Investing in the money markets is considered to be very safe as the returns are fixed in nature. Since investing in this market is safe it also means that the returns are lower. This is on account of the risk-return trade-off. Higher the risk, the higher is the return and vice-versa. On the other hand, the capital markets which do not have a fixed return on investments are volatile in nature and riskier as compared to the money markets. However, capital markets present the opportunity to earn a high rate of return.
- Money market instruments are highly liquid in nature. This is the reason why financial institutions and governments approach the market for short-term needs. The purpose of this market is to tend to short-term cash needs rather than investing in the needs of various financial institutions.
- Money market instruments are short-term in nature. The maturity of these instruments is generally less than a year. The maturity of these securities can be as less as one day also.
- This money market is dominated by wholesale transactions and retail investors you and me will not have direct access to this market. The main reason for this is the ticket size or the value of transactions. Money market transactions are high in value as opposed to capital market transactions. Individual investors will not have enough funds to cope up with this market.
- The government of different countries
- Central Banks
- Private & Public Banks
- Mutual Funds
- Insurance Companies
- Non-banking financial institutions
- Other organizations (these organizations are generally at the borrowing side of the market and generally trade in Commercial Papers, Certificate of Deposits, etc.)
- Monetary Equilibrium: This market helps to bring a balance between the demand and supply of short-term funds in the market. This helps to bring a monetary equilibrium
- Availability of funds: By making funds available to various different participants in the market, the money market promotes the economic growth of the country
- Check on liquidity: The Government can keep a check on the liquidity in the country by means of the money market. (Please refer Treasury Bills section to understand how liquidity can be controlled by the Government and the Central Bank)
- Check on inflation: By controlling the liquidity in the marketing, the Government can keep a check on the inflation of the country as well. If the liquidity is controlled, it will tend to control the ever-increasing prices in the market.
- Promotes saving and investment in the country by giving a platform to wholesale as well as retail investors for investing/borrowing of funds.
Money market instruments have their own set of unique short-term securities. Let us understand the most important of these securities.
#1 – Call Money
Call money is one of the most liquid forms of money market instruments. The validity is generally one working day. Banks can have shortfalls that they can fund through borrowing call money from the money market. Other banks who have access or surplus cash can invest in other banks through call money.
This is also called Bank Money although it is not restricted to banks. Other financial institutions can also invest/borrow through call money.
There is no organized market for call money and the transactions between banks generally take place by means of phone calls/emails/faxes.
The rate at which call money can be borrowed or invested in the market is called as the call rate.
The main reason why banks require call money is for maintaining the statutory reserves such as cash reserves. Banks have to maintain certain liquid cash on a day-to-day basis as a mandatory requirement by most Central Banks. In case there is a shortage of liquid cash that does not cover the mandatory requirement at the end of the day, banks turn to the call money market for funds.
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#2 – Treasury Bills
T-bills are issued by the Central Bank of the country on behalf of its Government. Whenever Government is in need of funds, it raises money in the market through Treasury Bills. This is considered one of the safest investments as it is backed by the government itself. The tenure of these bills is generally from 14 days to 364 days.
#3 – Commercial Papers (CPs)
As the name itself suggests, Commercial Papers are generally used by various companies to fund their short-term working capital needs such as payment of accounts receivables, buying of inventory, etc.
These are unsecured in nature which makes that there is an underlying asset of the company attached to it.
In case of liquidation of the company, they will not have priority against other secured financial money market instruments.
They are short-term in nature with the average maturity being two odd months. Just the Treasury Bills, these are also issued at a discount and therefore, interest is not paid separately. The rate of interest is determined by the forces of demand and supply of liquid funds in the market.
#4 – Certificate of Deposits (CDs)
A Certificate of Deposit is a type of Time Deposit with the bank. Only a bank can issue a CD. all other Time Deposits, even CDs have a fixed maturity date and cannot be liquidated or withdrawn prior to that date. This tends to be one of the major disadvantages of Certificate of Deposit as it restricts its flexibility.
#5 – Repos
Repo is a short repurchase agreement. Let us take an example of Bank A is in need of funds and Bank B has surplus funds.
Bank A will enter into an agreement with Bank B for selling its securities (mostly Treasury Bills) and get the required funds from Bank B. However, this does not end here.
There is a twist in the agreement which states that Bank A will repurchase these securities from Bank B at a fixed future date.
These are very short-term in nature. They can be for just overnight purposes or up to a period of one month depending on the agreement between the banks. These are popular amongst banks because this eliminates the credit risk involved as the securities are directly transferred to one another.
Money Market Funds
As we have seen earlier, entry for retail investors is restricted/limited in the money market due to the volume of transactions. However, retail investors can gain indirect access to this market through Money Market Funds.
These are Mutual Funds that invest the money of retail investors into various money market instruments.
Retail investors can buy and sell units of the Money Market Funds at the prevailing NAV through the mutual fund market which is a part of the Capital Market.
This has been a guide to what is Money Market and its meaning. Here we discuss the types and functions of the money market along with types and characteristics. You may learn more about financing from the following articles –
Money Market mutual fund
A money market mutual fund is a kind of mutual fund that invests in ultra-safe or low risk securities. The purpose of the fund is to conserve the capital of the fund and it is unusual to see the NAV of a money market mutual fund go below one.
The NAV can go below one if the securities do badly but it is quite rare to happen. A Money Market Mutual fund is meant for people who wish to maintain their capital and park their short-term cash into a safety that gives — stable but low returns.
It is also used by citizens who want to balance their portfolio and build in some security. If you have a lot of stocks in your portfolio then money market funds can balance your overall portfolio by providing capital safety.
Money Market Mutual Funds present — securities of domestic and foreign issuers.
They are securities that are naturally — high quality (low risk) short term securities that can have a fixed, floating or changeable interest rate.
A money market mutual fund in india usually invests in the following type of assets:
- Bank certificates of deposits
- Banker’s Acceptance
- Bank Time Deposits
- Commercial Paper
- Repurchase Agreements
A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free.
Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free.
When investing in a money-market fund, attention should be paid to the interest rate that is being offered.
See Also: Money Market Instruments
What is Money Market mutual fund?
A money market mutual fund is a kind of mutual fund that invests in safe and low risk securities. These are good short term investment options available to retail investors in India. Money Market Mutual Funds are used to manage the short-term cash needs.
It is an open-ended scheme in the debt fund category that deals only with cash or cash equivalents. As these securities have an average maturity of one year, they are termed as market instruments.
Money market mutual funds invest in treasury bills, certificate of deposit, commercial papers and repurchase agreements.
Purpose of Money Market Mutual Funds:
Listed below are some of the uses of money market mutual funds:
- The money market mutual funds help in Industrial financing by providing short term funding. Short term funding from money markets can help industries finance day to day operations and meet working capital requirements.
- The money market mutual funds are a profitable and safe investment option for investors who wants to invest in low risk mutual funds
- These instruments help commercial banks and corporations borrow money from the market and give investors options to invest and generate income.
How do Money Market Mutual Funds work?
A money market mutual fund is a low risk security that is used to fund short term cash requirements.
It is an open ended scheme that invests in debt securities of short term nature, that deals in cash and cash equivalent schemes.
These instruments are short term investment options with an average maturity of one year. This is the reason these investment instruments are termed as money market instruments.
mutual funds, money market mutual funds are also managed by fund managers who invest in debt instruments treasury bills, repurchase agreements, commercial papers or cash equivalents. The fund managers are responsible for managing these funds and earning return for the investor.
Types of Money Market Mutual Funds:
There are mainly four types of money market mutual funds in which the investor can choose to invest. It is important to know in detail on this investment instrument before investing in these debt instruments. Here are the various money market instruments that are available in the market for investment:
Certificate of deposit:
A certificate of deposit is a savings instrument that is similar to fixed deposit. However un fixed deposit, the certificate of deposit cannot be withdrawn before maturity. These deposits have a fixed maturity date and a specified rate of interest.
The certificate of deposit was introduced in Indian market in the year 1989 to increase the range of options of money market instruments. Certificates of deposit are issued by scheduled commercial banks and some select financial institutions in India and are monitored by the RBI. The RBI issues guidelines for certificate of deposit from time to time.
Commercial Paper is an unsecured money market instrument issued in the form of a promissory note.
It was introduced in India in 1990 with a view to enable highly rated corporate borrowers diversify their sources of short-term borrowings and to provide an additional instrument to investors.
Commercial paper is a money-market security, issued (sold) by large corporations to obtain funds to meet short-term debt obligations (for example, payroll), and is backed only by an issuing bank or company with a promise to pay the face value on the maturity date specified on the note.
Treasury bills are short term borrowing instruments issued by the government of India. These are the oldest money market instruments that are still in use.
The treasury bills do not pay any interest, but are available at a discount to their face value at the time of issue. Treasury bills can be classified in two ways i.e. maturity and type. These are the safest instruments as these are backed by a guarantee of the government.
The rate of return, also known as risk-free rate, is low on Treasury bills as compared to all other instruments.
It is an agreement under the reserve bank of India that lends money to commercial banks. The repurchase agreements mainly involve the sale and purchase of agreements at the same time
Advantages of Money Market mutual fund:
When it comes to investments, mutual funds are the best investment options in Indian market today.
The investors are attracted towards mutual funds as these are good investment options that provide the investor higher returns.
With money market mutual funds, the investor can invest in safe and stable instruments of investment that have a sovereign guarantee. Listed below are the advantages of money market mutual funds:
- Money market instruments are short term investment options, that have a maturity of less than a year. These are safe and effective investment options for investors.
- The best money market funds offer around 8% — 8.5% returns — nearly double that of a savings account.
- Money market funds are issued by the central and state governments, banks, PSUs and other corporates.
- You can choose the desired fund as per its maturity period and associated risk.
- Money market mutual funds are rated by independent agencies, making it easy for you to pick the right fund.
- All the mutual funds are registered with SEBI. They function within the provisions of strict regulations created to protect the interests of the investor.
Special Features of Money Market Mutual Funds
- Money market mutual funds are one of the safest instruments of investment for the retail low income investor. The assets in a money market fund are invested in safe and stable instruments of investment issued by governments, banks and corporations etc.
- Generally, money market instruments require huge amount of investments and it is beyond the capacity of an ordinary retail investor to invest such large sums. Indian Money market funds allow retail investors the opportunity of investing in money market instrument and benefit from the price advantage.
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There are different classes of money market funds where they invest their funds. Here is a list of some Money Market Mutual Funds
- UTI Liquid Short Term Plan (G)
- Tata Treasury Manager-RIP (G)
- LIC MF Liquid Fund (G)
- ING Treasury Mgmt Fund (G)
- UTI Money Market Fund (G)
- SBI Magnum Cash-Liq Floater -(G)
- HDFC Cash Mgmt.
Fund — SP (G)
- ING Treasury Plus — RP (G)
- Reliance Liquid Fund TP (G)
- AIG India Liquid Fund-RP (G)
- Birla Sun Life CM (G)
- ICICI Pru Liquid Plan (G)
- Kotak Liquid Regular (G)
- Sundaram Money Fund (G)
- IDFC Cash Fund (G) Not Rated
- JM Money Manager Fund -RP (G)
- Templeton (I) Cash Mgmt (G)
- Bharti AXA Liquid Fund-RP (G)
- Edelweiss Liquid Fund -RP (G)