Meet the Money Market Mutual Funds


When you think about mutual funds, the first thing that generally comes to mind is equity and the stock market. What a lot of people don’t realize, is that’s only half the story. For the more cautious investors, there are mutual funds that invest exclusively in fixed-income securities, that unlike equity, carry a lot less risk and deliver much better returns when compared with general banking products.

Mutual funds that invest in fixed-income securities are called debt funds and investments include corporate bonds, government securities, commercial paper (CP), certificates of deposit (CD), treasury bonds, and money-market instruments. Money-market instruments are funds that finance businesses for short periods of time in order to create a cash buffer to negate the gaps in payment cycles. These are great if you’re looking for a quick turnaround as investment options range from overnight to a year.

So the obvious question here would be “why doesn’t everyone invest in debt funds instead of putting their money in the bank?” The answer, debt instruments aren’t generally available for purchase because the minimum investment requirements put them out of reach of most retail investors. This is where mutual funds come in and make these fixed-security investments available to everyone who has a little cash to spare. Additionally, since these funds are all tied to some sort of corporate debt, they appreciate when interest rates fall.

Now there are about a dozen different types of debt funds and to keep it sweet and simple, we’re going to keep the definitions as short as possible.

First, we have them categorized by maturity period:

1. Liquid funds: Pretty self-explanatory, the main factors here are minimum investment period is 1 day, maximum period 91 days, and funds are invested in debt instruments that can be liquidated at any time. This is why liquid debt funds don’t have any lock-in period and redemption is typically processed in 24 business hours. Investments include different types of debt securities like treasury bills, certificates of deposit, commercial paper, and more.

2. Ultra-short-term funds: These have a slightly longer “wait-time” than liquid funds, come with a maturity period of anywhere from 3 to 6 months, and investments are exclusively in money-market and debt securities.

3. Low duration funds: Investments are in money-market and debt instruments while the maturity period is 6 to 12 months.

4. Short duration funds: Investments are in corporate and government bonds while duration is 1 to 3 years.

5. Medium duration funds: Investments are in corporate and government bonds while duration is 3 to 4 years.

We also have them categorized by investment portfolio:

6. Money-market funds: Investments are predominantly in money-market instruments and maturity is up to 1 year.

7. Corporate bond funds: Investments are predominantly in corporate bonds with a high rating (AA+ and above) and maturity is up to 1 year.

8. Credit risk funds: Investments are predominantly in corporate bonds with a rating of AA and below, and maturity is up to 1 year.

9. Banking and PSU fund: 80% investment in banks, public sector undertakings, and public sector financial institutions, the maturity period is 1 to 10 years.

10. GILT Funds: 80% invested exclusively in government securities, maturity period 3 to 5 years.

11. Floating rate funds: Since rising interest rates in the economy adversely affect banking and PSU funds, floating-rate funds offer more agility by investing at least 80% in fixed-income securities with variable interest rates. This means while the maturity is up to 7 years, the interest typically gets adjusted every 30-90 days.

12. Fixed maturity funds: Investments in high-rated debt securities and corporate bonds, investment is only available during a new fund offer, and maturity is predetermined.

In conclusion, if you don’t want to risk the stock market to get better returns on your money, debt funds are the next best thing. Not only do they come with quick turnaround times, they also minimize risk by investing in fixed-income securities.


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