MMFs invest in fixed-income instruments maturing in less than one year, minimising interest-rate risk.
Money market funds (MMFs) have gained popularity among debt investors.
As of May 31, 2024, these schemes managed assets worth Rs 1.93 trillion, second only to liquid schemes that managed Rs 4.97 lakh crore.
MMFs saw Rs 8,271 crore inflows in May 2024, next only to liquid funds (among debt schemes), which received Rs 25,873 crore.
Over the past year, ending June 18, 2024, these schemes delivered an average return of 7.1 per cent.
MMFs are suitable for many fixed-income investors.
"MMF is an all-weather fund category with low to medium interest-rate risk. This favourable risk-return profile has helped in the healthy growth in assets under management (AUM), which is expected to continue," says Anju Chhajer, senior fund manager, Nippon India Mutual Fund.
Low-risk product
MMFs invest in fixed-income instruments maturing in less than one year, minimising interest-rate risk.
They typically avoid credit risk, focusing on high-quality instruments like treasury bills, bank certificates of deposit, government securities, and state development loans with maturity below one year.
Low interest-rate risk and low credit risk make MMFs ideal for conservative investors.
"As liquidity improved in April and May, yields of shorter-term assets declined, impacting the yield to maturity (YTM) of liquid funds," says Sirshendu Basu, head, products, Bandhan Asset Management Company.
"By May 2024, liquid funds' average YTM had dropped to 7.1 per cent, while that of the MMF category remained around 7.5 per cent. Given the risk-reward dynamics and the yield differential of approximately 40 basis points, investors preferred MMFs," adds Basu.
What next?
The Reserve Bank of India is expected to cut repo rates in the second half of the financial year.
"Currently 6 to 12-month yields on Certificates of Deposit (CDs) and Commercial Papers (CPs) are higher. Investors can capture this by investing in MMFs," says Jalpan Shah, fund manager-fixed income, TRUST Mutual Fund.
Since these funds invest in very short-maturity instruments, Shah adds they cannot participate in capital gains if and when interest rates move lower.
"Interest rates are expected to ease in future. Liquidity is also expected to improve. Investors with short-time horizons find value in the product as it provides higher carry (compared to liquid) and low volatility of returns," says Chhajer.
Go for quality
Opt for a scheme with a large AUM, a low expense ratio, and one which invests in high credit quality instruments.
"The basic parameters for choosing an MMF are credit quality, maturity, and consistency of performance," says Chhajer. Basu suggests looking at parameters like the current duration and the fund's YTM as well.
Ideal for short-term investments
MMFs are suitable for those with a shorter investment horizon.
"Conservative investors looking for a low-risk investment vehicle may go for them.
"Since the underlying instruments are relatively liquid, investors can consider them to park surplus funds for the short term," says Basu.
For longer time frames or to benefit from potential interest-rate declines, long-duration schemes may be more appropriate.
"Park emergency funds here which may be required at short notice," says Chhajer.
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Feature Presentation: Ashish Narsale/Rediff.com
