Money Market Funds

What Are Money Market Funds? • Debt mutual funds that invest in money market instruments with maturity up to 1 year. • Aim to provide high liquidity, capital safety, and slightly better returns than liquid or savings accounts. Where Do They Invest? • Treasury Bills (T-Bills) • Commercial Papers (CPs) • Certificates of Deposit (CDs) • Repo & Reverse Repo instruments • Call money and short-term government securities Purpose and Suitability • Ideal for investors with an investment horizon of 3 months to 1 year. • Suitable for short-term parking of surplus money with better returns than savings accounts or FDs. • Appropriate for conservative investors seeking low-risk debt exposure. Key Features • Maturity of instruments: Up to 1 year (365 days) • Return expectation: Around 5.5% to 7.5%, depending on interest rate movements • Risk: Low to moderate; slightly higher than liquid funds due to longer maturity papers • Liquidity: High; redemption processed in T+1 working day • Exit load: Usually nil or very low if redeemed after a few days • No lock-in period Taxation • Short-Term Capital Gain (held < 3 years): Taxed as per investor's income slab • Long-Term Capital Gain (held ≥ 3 years, pre-April 2023): Taxed at 20% with indexation • Post-April 2023: Taxed as per slab unless fund holds ≥ 35% in equity Pros • Safer compared to long-duration funds • Offers better yields than liquid and ultra short funds • Good for systematic transfer plans (STPs) into equity funds • Offers flexibility and liquidity with stable returns Cons • Returns not guaranteed, though relatively stable • Sensitive to interest rate fluctuations • Not ideal for very short-term (under 1 month) or long-term investments