Low-Duration, Low-Risk Funds

 As we looked at the different types of debt securities in our previous post titled “Meet the Money Market,” in this post, we’re going to look exclusively at money market funds and how they are a great way to make some extra returns in under a year. As we mentioned earlier, money market funds invest in money market instruments, and since the investment period is only 1 year, the portfolio is strategically diversified in order to maximize returns over that 1 year period.

These funds are highly secured since investments are only made in money market instruments issued by organizations with strong credit ratings. Think of it like this, instead of putting your money in a fixed deposit for a year, your lending it to organizations that have an excellent credit history, hence the two main characteristics of money market funds, low-duration, and low-risk. These instruments include certificates of deposits, commercial papers, treasury bills, repurchase agreements, and more. 


Now while returns are not guaranteed, based on the liquidity of investments as well as the track record of the issuing companies, these funds are virtually risk-free. Additionally, it’s impossible to put your money to work on a corporate level of this scale as a retail investor, especially because the minimum “buy-in” is quite high. Money market funds, on the other hand, have low to no minimum investment requirements and are typically open-ended meaning additional investments can be made at any time.


The big question here obviously is “how much does it all cost,” and the answer is that while fund houses typically charge a TER (total expense ratio) based on the NAV (net asset value), as of September last year, SEBI has capped that at 1.05%. NAV is the current value of all the securities held by the scheme, minus liabilities, and this means fund houses cannot charge investors a TER that’s more than 1.05% on the NAV. This not only ensures malpractices like misselling and churning are avoided, but it also makes money-market funds more transparent and affordable at the same time.


As opposed to NAV which as we already mentioned, is net asset value minus liabilities, AUM or assets under management, is the cumulative sum of all the investments made by a mutual fund.


Now while all these funds have a 1-year option that gives better returns than most banking products, there are also 3-year and 5-year options that have higher returns.


In conclusion, Money market mutual funds are designed and calibrated for low-risk, low-duration returns that have minimum investment requirements and are available to the general public. Contact us for more information on how you can put your money to work, financing organizations with impeccable credit, from the comfort of your home.

Comments

Post a Comment

Popular posts from this blog

Understanding ESG Funds

Greetings, We hope you found our previous post on open-ended, fixed maturity funds, both useful and informative. If you haven’t had a chance to read it yet, we’ve put it here so you don’t miss out! While 2020 ushered in a global crisis on a scale that humanity had never seen before, 2021 continues to teach us hard lessons earned over decades of practicing unsustainable economics. Pollution, strip-mining, deforestation, over-fishing, and hunting animals to extinction are just a few examples of the effect our economies have on the environment. As the world tries to move forward from the mistakes of the past, one of the things we’re trying to focus on is sustainability, and not taking more from the environment than we can put back. This focus is being delivered right at the root of our financial ecosystem by changing the way responsible investors invest their money. Measuring sustainability Sustainability today is measured in terms of E, S, and G, which stands for environmental, social,
Read more

Proper Planning Brightens the Future of Personal Finance

Traditionally Indians are bound to the practice of Savings. There is a deep-rooted sense of managing the income by spending less and postponing the luxuries of life. But this ‘saving culture’ has come under threat. The change in mindset is very evident with the youth and the EMI fixated middle aged salary earners, who are impressed with the easy spending consumer culture of the west. But the recent global pandemic has exposed the virtues of savings. Even after pay cuts people have realised the power of saving money and planning for the future. Today, those who saved and invested wisely are secure in their lives and livelihood. Their past course of action brings to light the quintessential question running in everyone’s mind “How much to Save to plan a secure future”. The truth be told there is no one size fit all planning strategy for savings. But a general thumb rule to start saving is to start analysing spendings.  Income - Expenses = Savings Spending before saving is a very wrong ap
Read more

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

  Greetings, We hope you found our previous post on the Married Women’s Property Act useful and informative. If you haven’t had a chance to read it yet, we’ve put it here so you don’t miss out. What a lot of people don’t realize while planning out their retirement is that interest rates for developing countries go down as they progress and develop. If you were sitting around thinking people in the US, UK, Sweden, Switzerland, or any other first-world country for that matter, were raking in big bucks on money sitting in the bank, think again. In fact, in some developed countries like Denmark and Japan, for example, they have negative interest rates and it actually costs you money to use the banks. Additionally, the US interest rate FED is just 0.25% at the moment, down by 1.25% from March this year. What this means for pensioners or people planning their retirement is that in addition to accounting for inflation, they also need to account for lower returns on money sitting in fixed dep
Read more