Are money market funds ideal for investors with low risk appetite?

Debt mutual funds make a feasible investment option for investors with low risk appetite. In fact, several investors are switching from conservative schemes to debt mutual funds because of the constant down fall in the interest rates. While equity mutual funds predominantly invest in equity and equity related instruments, debt mutual funds invest in fixed income securities and money market instruments that generate regular income. Depending on the nature of the scheme and its investment objective a debt fund may invest across debt instruments like commercial papers, company fixed deposits, government bonds, income bonds, treasury bills, call money, corporate securities etc.

Currently there are 15 subcategories under debt funds and investors can choose a debt product which suits their investment objective and risk appetite. If you are looking to diversify your mutual fund portfolio with a scheme that invests in money market instruments and offers moderate returns, you can consider investing in money market funds.

What are money market funds?

According to market regulator SEBI (Securities and Exchange Board of India), money market funds “aim to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.”

Money market funds are ideal for investors with low risk appetite

Money market funds hold the potential to offer better returns than bank fixed deposits because these schemes invest in money market instruments like treasury bills, commercial papers, G-sec etc. Just like most debt funds, money market funds offer high liquidity and invest in securities that mature within a year. Such investment schemes are ideal for investors with low risk appetite. Money market funds are less prone to both credit risk and interest rate risk.

Since they do not come with a lock in period, investors are fee to buy or sell their money market fund units on any working day. Investors looking to add some liquidity to their investment portfolio can consider adding money market funds to their list of investments. Money market funds can also be utilized for diversification especially if you are an aggressive investor with an equity heavy portfolio. Most mutual fund experts will argue that investors cannot depend on just one asset class for income generation. It is less likely for all asset classes to perform in similar fashion all in tandem. Money market instruments can provide the much needed cushion when equity schemes underperform in volatile markets.

Consider starting a monthly SIP in money market funds

One of the simplest ways to ensure that you save and invest on a regular basis is to start a monthly SIP in a mutual fund scheme of your choice. Systematic Investment Plan, often referred to as SIP, is an investment plan that allows retail investors to invest a fixed amount at regular intervals. SIPs do not come with a termination date thus allowing investors to continue investing till their investment goal is accomplished. All you have to do is decide on the monthly SIP sum, complete all the necessary documentations, and instruct your bank to allow auto debit. After this every month on a fixed date a predetermined amount is debited from your savings account and units are allotted to your mutual fund portfolio. Investors can even continue to invest for the long run with SIP to benefit from investment tools and techniques like power of compounding and rupee cost averaging. A free online tool like SIP calculator may help aid investors in determining how much they need to invest at regular intervals in order to achieve the desired corpus.