Money market funds are types of debt mutual funds that invest in money market securities like short-term debt instruments, cash, and cash equivalents with a maturity period of up to a year. These are low-risk funds and ideal for short-term needs, emergency requirements, and other similar goals. You can invest in money market funds in a lump sum or start a SIP at a preferred frequency.
If you are thinking of investing in money market mutual funds, here are some things you must know before you start.
Where do money market mutual funds invest?
Money market funds primarily invest in AAA+ grade treasury bills, certificates of deposits, government securities with maturity of less than one year, commercial bills, commercial papers, repurchase agreements (repos), etc.
What are the benefits of investing in money market mutual funds?
Here are some benefits of investing in money market funds:
- They are suitable for diversification: These funds invest in various money market securities. They carry low credit risk and can produce stable returns. This helps diversify your investment portfolio and reduce its overall risk.
- They offer stable returns for short-term goals: Money market mutual funds are ideal for short-term purposes. Compared to similar funds like liquid funds that mature in up to 91 days, money market funds develop in up to a year. This gives you a better chance at maximizing your returns.
- They carry low investment costs: no exit charges are imposed on these funds. Moreover, the expense ratio has been capped at 1.05% by the Securities and Exchange Board of India (SEBI).
- They provide high liquidity: Money market mutual funds do not have any lock-in period. Besides, you can redeem your funds anytime you want with no exit charges. This is great for any unexpected financial emergency.
- They offer flexible modes of investment: Money market funds let you invest in a lump sum as well as with a SIP, adding more flexibility to your investment routine.
How are money market mutual funds taxed?
Earnings from money market funds can be categorized as dividends and capital gains. The dividend income from these funds is added to your taxable income and taxed accordingly. On the other hand, capital gains are taxed as short-term or long-term capital gains.
Investments held for up to three years are considered short-term capital gains and taxed at the income tax slab rate you fall into in a financial year. Assets held for more than three years are considered long-term capital gains and taxed at 20% after indexation.
Who should invest in market mutual funds?
Money market funds are suitable for short-term liquidity needs. So, you can invest in them if you need to raise money for an approaching requirement. These funds can also be used to park your funds as they offer better returns than a bank savings account. Moreover, since they carry low to moderate risk, you can also invest in them to diversify your portfolio and move away from equity.
To sum it up
The Tata Capital Moneyfy App can help you invest in money market mutual funds. You can browse through different funds, schedule your SIPs, and manage your investments on your smartphone from anywhere. So, go ahead and invest in a money market fund.