Not every investor wants to risk their finances to gain wealth by investing in stocks or equity markets. Some are happy with their existing wealth but want to earn some interest by investing the money which is sitting idle in their savings account. Today, it is possible to invest in investment schemes and earn interest rather than relying on conservative schemes. Although conservative schemes offer fixed returns, most of them come with lengthy lock in periods. Also, bank FD rates have been consistently falling in the recent past, thus leading to concerns among investors. If you are unhappy with your existing investments or feel that they do not hold the potential to help you achieve your life’s short term or long term financial goals, you can consider investing in mutual funds.
Mutual funds are a pool of professionally managed funds that invest across national and international securities to help the scheme achieve its investment objective. Mutual fund houses running funds collect money from investors sharing a common investment objective and invest this pool of funds across various asset classes and money market instruments. Depending on the mutual fund scheme’s nature, its risk profile and investment objective, the fund manager may diversify the investment portfolio by investing equity, gold, real estate or in debt instruments like call money, cash or cash equivalents, commercial papers, G-sec, treasury bills, high rated bonds, etc.
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.” Investors with moderate to low risk appetite and a short term investment horizon generally invest in money market funds. These debt schemes invest in money market instruments like cash and cash equivalent, high rated bonds. The debt instruments which the money market fund manager picks usually have a maturity period of one year and below. Apart from the fact that this fund aims to generate stable income with moderate to low investment risk, money market funds also try to ensure that the NAV of the scheme doesn’t get affected by the fluctuations in the market.
How can investors benefit from money market funds?
Money market funds carry moderate to low risk. These debt schemes predominantly invest in money market instruments that have high liquidity and low maturity. This allows investors to easily liquidate their fund units in case of a financial emergency or exigency. If your mutual fund portfolio consists of ELSS type investment schemes where the minimum lock in period is 3 years, adding money market funds to your investment portfolio will ensure that your portfolio receive the much needed liquidity.
Although money market funds are ideal for targeting short term goals, investors can even keep a long term investment horizon and start a monthly SIP. Systematic Investment Plan allows investors to invest small fixed amounts at regular intervals in any mutual fund scheme of their choice. All an investor has to do is become KYC compliant and he / she can start investing in money market funds via SIP from the comfort of their home or office. All you need is a smartphone or laptop and a decent internet connection, and you can start investing in mutual funds via SIP by logging on to the AMCs website and navigating to the SIP section.
Those who are new to mutual funds or financial planning in general, such individuals are expected to talk to their financial advisor before investing.