Money market funds (MMFs) have gained popularity among debt investors. As of May 31, 2024, these schemes managed assets worth Rs 1.93 lakh crore, second only to liquid schemes that managed Rs 4.97 lakh crore. MMFs saw Rs 8,271 crore inflows in May 2024, next only to liquid funds (among debt schemes), which received Rs 25,873 crore. Over the past year, ending June 18, 2024, these schemes delivered an average return of 7.1 per cent.
MMFs are suitable for many fixed-income investors. “MMF is an all-weather fund category with low to medium interest-rate risk. This favourable risk-return profile has helped in the healthy growth in assets under management (AUM), which is expected to continue,” says Anju Chhajer, senior fund manager, Nippon India Mutual Fund.
Low-risk product
MMFs invest in fixed-income instruments maturing in less than one year, minimising interest-rate risk.
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What next?
The Reserve Bank of India (RBI) is expected to cut repo rates in the second half of the financial year. “Currently 6-12-month yields on Certificates of Deposit (CDs) and Commercial Papers (CPs) are higher. Investors can capture this by investing in MMFs,” says Jalpan Shah, fund manager-fixed income, TRUST Mutual Fund.
Shah adds that since these funds invest in very short-maturity instruments, they cannot participate in capital gains if and when interest rates move lower.
“Interest rates are expected to ease in future. Liquidity is also expected to improve. Investors with short-time horizons find value in the product as it provides higher carry (compared to liquid) and low volatility of returns,” says Chhajer.
Go for quality
Ideal for short-term investments
MMFs are suitable for those with a shorter investment horizon. “Conservative investors looking for a low-risk investment vehicle may go for them. Since the underlying instruments are relatively liquid, investors can consider them to park surplus funds for the short term,” says Basu.
For longer time frames or to benefit from potential interest-rate declines, long-duration schemes may be more appropriate.
“Park emergency funds here which may be required at short notice, which one generally parks in a bank account or short-term fixed deposits. Funds may also be parked in these schemes and a systematic transfer plan (STP) can be carried out to invest in equity schemes or for any other planned long-term investment,” says Chhajer.
First Published: Jun 20 2024 | 5:10 PM IST