Money market funds are one kind of mutual fund that primarily invests in money market instruments that mature within one year. Money market means the financial market that deals with very short-term fixed-income instruments. The typical participants of money market funds are banks, institutional investors, corporations, other financial institutions, and more.
A money market fund will specifically carry characteristics such as a short investment duration, high liquidity, lower interest rates, and relatively lower yields.
Since money market funds invests in securities for a period of 1 year or less, they keep tweaking the duration so as to generate better returns and keep risk under control.
Moreover, these funds work similarly to any other mutual fund, but they are constructed in a manner that lets the fund manager generate higher returns while keeping their risks under control through adjustments of the lending duration.
The primary characteristics of a money market fund are as follows:
They have a short maturity tenure: The money market funds could range from a day to a year, based on the fund category.
They hold lower rates of interest: The interest rate sensitivity of fixed-income securities is directly linked to their maturity period. The longer the maturity, the higher the interest rate, and vice-versa.
They are highly liquid: They offer a high level of liquidity as they invest in liquid and secure debt-based assets.
Lower Returns: The longer the maturity, the higher the yield of fixed-income securities. The shorter the maturity, the lower the yield of fixed-income securities. Since money market funds come with short maturities compared to NCDs (non-convertible debentures), G-bonds, and more, their yields are lower than longer-duration securities.
Just like other investment choices, money market funds also have their merits and demerits and should be considered before investing in them. Also, money market funds are not ideal for long-term investing, but they make a good investment choice for individuals who want to stay invested only for the short term.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
