What is Money Market Fund? How Money Market Fund works in India?
A Money Market Fund in India is a type of mutual fund that primarily invests in short-term, low-risk debt instruments and money market securities. It is regulated by the Securities and Exchange Board of India (SEBI) and operates in accordance with the guidelines issued by SEBI.
Here's how a Money Market Fund works in India:
Portfolio Composition: Money Market Funds in India invest in a range of money market instruments, including Treasury bills, certificates of deposit (CDs), commercial paper, and other short-term debt instruments issued by government entities, banks, and corporations. The fund manager carefully selects these instruments to ensure high liquidity and low credit risk.
Short-Term Investments: Money Market Funds focus on securities with short maturities to provide stability and liquidity. These investments have a residual maturity of up to one year, allowing the fund to quickly adjust its holdings in response to market conditions and maintain liquidity.
Income Generation: Money Market Funds generate income through the interest earned on the underlying money market instruments. The interest rates on these instruments fluctuate based on prevailing market rates and the creditworthiness of the issuers. The income generated is passed on to investors in the form of dividends or periodic payouts.
Stable Net Asset Value (NAV): Money Market Funds in India aim to maintain a stable net asset value per unit, typically set at Rs. 10. This means that the value of each unit in the fund remains relatively constant, typically fluctuating within a narrow range around Rs. 10.
Liquidity and Redemption: Money Market Funds offer high liquidity to investors, allowing them to redeem their units and access their funds on any business day. However, there may be certain cut-off times for redemption requests, after which the redemption will be processed on the next business day.
Regulatory Compliance: Money Market Funds in India are regulated by SEBI and must comply with the regulations outlined by the regulator. These regulations define investment limits, credit quality requirements, portfolio composition guidelines, and other parameters to ensure investor protection and maintain the stability of the fund.
Investors in India choose Money Market Funds as a relatively safer investment option for parking short-term surplus funds or for maintaining liquidity. These funds offer competitive returns compared to traditional savings accounts, while still providing capital preservation and easy access to funds.
When considering investing in a Money Market Fund in India, it is important to carefully review the fund's investment objectives, past performance, expense ratios, and any associated fees. It is also advisable to understand the fund's specific investment strategy, credit quality of the underlying securities, and the track record of the fund manager. Reading the scheme information document and consulting with a financial advisor can provide further insights into the fund's suitability for individual investment goals and risk tolerance.
