Best Money Market Funds
About Money Market Mutual Funds
The money market is the marketplace where money flows are exchanged for the short term (i.e. overnight to one year). A money market fund or a money market mutual fund is a short-term debt fund that invests in highly liquid, near-term instruments of duration of less than one year. The instruments involved may include cash and cash equivalents and highly rated, debt-based securities with a short-term maturity (such as government securities, municipal securities, or corporate and bank debt securities). Therefore, money market funds are overall a type of low-risk fund.
They can be designed to cater specifically to either retail investors or institutional investors based on the minimum amount to invest. They can be divided into other categories as well, e.g. prime funds, government money market funds etc.
How Do Money Market Funds Work?
Money market funds buy these short-term securities, which typically have maturities of less than 1 year. The interest income generated from these investments is then distributed to the investors in the form of dividends, providing a return that is typically higher than regular savings or checking accounts.
Investors in these funds enjoy liquidity, as they can redeem their shares at any time. The Net Asset Value (NAV) of money market funds is typically maintained at a stable rate, ensuring a consistent value for investors.
Money market instruments are regulated by SEBI to maintain stability and safety. They aim to minimise credit risk by investing in high-quality securities and diversifying their holdings.
Features of Money Market Funds
Money market instruments in India can be of primarily four types –
- Treasury Bills or T-bills – T-bills are short-term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. They are zero coupon securities.
- Certificate of Deposit – A Certificate of Deposit or CD is a term deposit offered by scheduled commercial banks which does not have the option of premature redemption. The basic difference between a CD and a Fixed Deposit is that CDs are freely negotiable.
- Repurchase Agreements or Repos – These are contracts under which a party agrees to give away short-term loans, possibly with collateral.
- Commercial Papers – Companies and financial institutions with robust credit ratings can issue a commercial paper – a short-term, unsecured promissory note. It helps in their diversification of short-term borrowing sources. CPs are usually issued at a discounted rate, while the redemption is done at face value. The investor earns the difference.
Advantages of Investing in Money Market Funds
The primary advantage that money market mutual funds in India offer is that they are low-risk. The low level of risk involved occurs due to the following reasons –
- Most of the investments are in debt instruments. Now, debt instruments can fall in value due to either the defaulting of the debtor or a rise in the interest rates by the central bank. But the likelihood of a debt instrument’s value dropping is less likely than that of an ordinary stock – this is because compared to the processes in place to ensure repayment of debt, there are few checks in place against a falling stock price.
- Money market funds tend to invest in debt securities that are highly-rated by credit rating agencies.
- Money market funds can also be easily and more accurately diversified. For example, in order to properly categorise a stock in terms of the risk level, you can use a wide range of facts and figures – but overall, it will be much harder for a retail investor to find a reasonable formula to predict future performance. On the other hand, you can easily go through the portfolio of money market funds and check the credit ratings of the debt instruments the funds have invested in so as to gauge the level of risk the fund is undertaking. With that knowledge, it becomes easier to diversify your money market fund portfolio as and when required.
Risks Involved in Money Market Funds
The risks that money market mutual funds suffer from are the following –
- Credit default risk – The debtor may fail to pay back the principal and/or interest amount in due time, resulting in losses for the fund and, thus, lower returns.
- Interest rate risk – If the central bank increases the interest rates, then the debt instruments held in general lose value as the new debt instruments in the market with their higher interest become more attractive. Loss in value of too many of the debt instruments in the fund’s portfolio can cause a fall in the value of the fund.
Factors to Consider Before Investing in Money Market Funds
- Risk Tolerance: Assess your risk tolerance before investing. Money market funds are generally low-risk, but they are not entirely risk-free. Ensure your risk level aligns with the fund’s stability.
- Liquidity Needs: Consider your short-term liquidity needs. Money market funds are ideal for parking cash you may need in the near future, but they may not offer the same returns as longer-term investments.
- Expense Ratios: Compare the expense ratios of different money market funds. Lower expenses can significantly impact your overall returns.
- Credit Quality: Check the credit quality of the securities held by the fund. Higher credit quality usually implies lower risk.
- Yield and Returns: While money market funds aim for stability, they still compare their yields and historical returns. Choose one that provides a competitive yield without compromising safety.
Who Should Invest in Money Market Funds?
Money market funds are low-risk investments that can be a good place to park the money instead of fixed deposits (especially if the fixed deposits available have a large exit load and lock-in period, while the funds do not). They may not pay as high a return as perhaps a small-cap equity fund. But, their low-risk level allows them to be used by investors to diversify their portfolio by creating a solid, reliable base for other risky investments.
Moreover, unlike equity funds, which may need time to reap their largest benefits, the short-term investing nature of money market funds allows them to generate stable returns on a regular basis, perhaps in less than a year of deployment. A combination of stable, early returns and low expense ratio makes money market funds great for both short-term and long-term investing.
Therefore, it is ideal for those investors who have a surplus of cash in the short term such that they need to invest the cash and forget about it for about a year, or they want to park some funds in a secure place and then focus on deploying their other funds in risky avenues elsewhere.
Taxability of Money Market Funds
There are two types of income from money market funds, which are taxed – dividends and capital gains.
Dividend taxation – The dividend income is added to the investor’s taxable income and taxed as per their slab. There is also a 10% TDS charged by the mutual fund house on a dividend amount exceeding ₹5,000 in a financial year.
Capital gains taxation – If you buy and hold units of the scheme for a period of less than three years, then your gains are considered to be short-term capital gains. This gain is added to your taxable income and taxed as per the applicable income tax slab.
On the other hand, if you hold the same mutual fund units for more than three years, then the capital gains earned are called long-term capital gains (LTCG), which are taxed at 20% with indexation benefits.
How To Invest in Money Market Funds?
Investing in Money Market Funds can be easily done through your Angel One account. Just follow these simple steps:
Step 1: Access your Angel One account using your registered mobile number, complete the OTP validation, and input your MPIN. If you don’t have a Demat account with Angel One, you can easily open one by completing the KYC procedure and submitting the required documents.
Step 2: Identify the most suitable mutual fund based on your financial goals and risk tolerance. Explore the mutual fund options available on the Angel One app, considering the following factors:
- Search for your desired fund or take recommendations from Angel One’s curated list.
- Analyse the fund’s historical performance, tax implications, sectors and stocks it comprises, and potential returns using the provided calculator.
- Assess the fund’s risk level and align it with your own risk tolerance.
- Take into account the fund’s ratings from reputable rating agencies, typically on a scale from 1 to 5.
- Examine the fund’s expense ratio to gauge the cost associated with your investment.
Step 3: Once you’ve made your fund selection, log in to your Angel One account, navigate to the Mutual Funds section, and locate the chosen fund(s). As this might be a long-term investment, exercise caution during this phase:
- Decide whether you want to invest a lump sum or opt for a monthly SIP (Systematic Investment Plan).
- Specify the amount you wish to invest and choose your preferred payment method, with UPI being the recommended option. Alternatively, you can use net banking.
- For SIP investments, set up a mandate for convenient future contributions.
Top 5 Money Market Funds to Invest in
Those interested in money market mutual funds can invest in the following top five best money market funds available in the Indian market –
| Name of the Fund | Assets Under Management (in ₹ cr) | Minimum Investment Amount (in ₹) | 3 Year CAGR (%) | 5 Year CAGR (%) |
| UTI Money Market Fund Direct Plan Half Yearly IDCW Payout | 7,298 | 20,000 | 5.17 | 8.07 |
| Edelweiss Money Market Fund Direct Plan Growth | 341 | 5,000 | 4.51 | 7.42 |
| Aditya Birla SunLife Money Manager Fund Growth Direct Plan | 11,611 | 1000 | 5.32 | 6.42 |
| HDFC Money Market Fund Growth Direct Plan | 12,835 | 100 | 5.28 | 6.34 |
| Nippon India Money Market Fund Direct Plan Growth | 9,362 | 500 | 5.15 | 6.29 |
The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on the 5-year CAGR, which is subject to change frequently. Check out real-time data on Angel One.
UTI Money Market Fund Direct Plan Half Yearly IDCW Payout
This fund has an expense ratio of 0.2% and no exit load or lock-in period. The fund was launched in September 2014. Its top investments are in 182-day T-bills and debt instruments of other companies.
Edelweiss Money Market Fund Direct Plan Growth
The fund has a fairly low expense ratio of 0.26% and no exit load. Its largest investments are in 364 day T-bills and corporate debt of Kotak Mahindra Bank, Bank of Baroda, Canara Bank etc.
Aditya Birla SunLife Money Manager Fund
The fund has an expense ratio of 0.21% and no exit load. Its top investments are in commercial papers, certificates of deposits and 182 day T-bills – around 14% of the total investments being in government securities.
HDFC Money Market Fund Growth Direct Plan
The fund has an expense ratio of 0.21%. The majority of its investments are in certificates of deposits, followed by commercial paper and t-bills. Around 40% of its investments are in public sector banks.
Nippon India Money Market Fund Direct Plan Growth
This fund has an expense ratio of 0.21% and no exit load. Its top investments are in 182 day T-bills, TREPS and other bonds. The fund started in 2013 and has covered a fairly long journey.
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