Money market funds are an efficient choice for those seeking low-risk, better-than-savings-account returns in a falling rate regime. These offer accrual income and capital gains and are more rewarding than savings accounts or short-term fixed deposits.
Money market funds invest in high-quality, short-duration instruments like treasury bills, commercial papers, and certificates of deposit, many of which are now yielding upwards of 7%. In contrast, traditional savings accounts are offering around 3%.
These funds offer T+1 liquidity, making them a better option than locking money in a fixed deposit, especially in the current falling rate environment. These do not lock the investor’s money and offer greater flexibility without sacrificing return, making them a more efficient tool for short-term parking of funds.
In a falling interest rate environment, while fresh fixed deposit rates get reset lower quickly, money market funds benefit from holding short-term instruments acquired before the rate cuts, allowing them to offer yields that are often higher than both new fixed deposits and savings accounts.
Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor, says, money market funds provide a safe and liquid option for investors seeking stable returns in a declining interest rate environment. “Individuals should consider them for parking short-term funds as they combine safety and liquidity,” he says.
Money market funds are attracting investors as data from Association of Mutual Funds in India show ne inflows of Rs 11,223 crore in May this year. This is the second highest infows within 16-sub categories in debt mutual funds. In contrast, liquid funds reported largest outflows of Rs 40,205 crore and overnight funds saw an outflow of Rs 8,120 crore in the same month.
Higher yield than liquid funds
Money market funds are also delivering higher yields than liquid funds as they can invest in instruments with slightly longer maturities up to one year as compared with 91 days for liquid funds, allowing them to lock into better rates.
Sonam Srivastava, founder, Wright Research PMS, says yields in money market funds are 7.2–7.5% as compared with 6.8–7.0% in most liquid funds. Thus for anyone looking to deploy idle capital with better accrual and relatively low duration risk, money market funds are a compelling fit.
Money market funds dynamically roll over into newly issued instruments and can capitalise on residual high yields in the short term before rates fall further. Additionally, they benefit from mark-to-market gains as bond prices rise when rates drop. “This makes money market funds a relatively more agile and rewarding option during rate transitions, especially for investors with a 3–12 month horizon seeking liquidity and tax efficiency over fixed-rate alternatives,” says Srivastava.
Holding period
The ideal holding period for money market funds is 3–12 months. For shorter durations (<1 month), liquid funds may be more suitable due to lower volatility and exit load structure.
Nirav Karkera, head, Research, Fisdom, says money market funds provide an attractive accrual opportunity in the current transition phase of the rate cycle. However, due to their slightly longer maturity, they carry modest mark-to-market risk compared to liquid funds. “An ideal holding period of three to six months is recommended to let yields accrue and smooth out any short-term volatility,” he says.
Picking the right funds
Investors should choose funds with high exposure to AAA or sovereign-rated instruments to minimise default risk. They must understand the interest rate sensitivity. While it is lower than other debt categories, there is still some sensitivity to yield movement. They must look at the exit load as some funds may have exit loads up to seven days.