Check this out before opting for money market investments
Posted on: 19/Jun/2018 6:45:05 PM
Looking for a way to invest your excess money in a safe and secured way, expecting huge returns along with liquidity of cash? Well, you may opt for money market mutual funds, but are you aware of what it is?
What is money market mutual funds?
In money market mutual funds, investors invest their money in a much secured manner with high-quality liquid instruments. This involves commercial papers, certificates, repurchase agreements, treasury bills, and so on. In specific, the liquid funds make use of your money invested in short-term market instruments where the maturity period is 91 days. Here, you may choose to keep your money for a short time period ranging from 1 month to 3 months. This can be served as emergency funds.
Speaking to experts, they say this liquid funding can easily be used for emergency needs, children education, vacation or outings, day to day expenses if you feel insecure of losing your present job. In case of equity investors, STP is used. It stands for Systematic Transfer Plans where funds are transferred from equity to liquid funds of meagre risk. Thus, the investment stays protected, especially when you are nearing retirement age.
Below mentioned are some kinds of money market mutual funds that you probably may invest in:
Debt Funds
By investing in a debt fund, you aim at obtaining interest income and also have capital appreciation. This is suitable for conservative investors and suits both short as well as medium term investing.
In case of short-term investments, you may choose liquid funds that provide higher returns as compared to SB accounts where you get 6.5 to 7.5 percent. Here the liquidity level is less for meeting any emergency needs.
In case of medium-term investments of the range 3.5 years, you may opt for dynamic bond funds. Here fund manager will often change the portfolio duration with purchase and sale of securities having high or low maturity levels. In case of dynamic bond funds, there is good returns enjoyed by the investor at rising as well as falling interest rates. This is suitable for investors struggling to make proper interest rate prediction.
Gilt Funds
Here, the investment is made in government bonds and securities. Investors enjoy double benefits where safety and good returns are equally enjoyed. In guilt funds, investments are made in government bonds without any kind of risk. The portfolio is diversified here and investors can get guaranteed returns.
These are excellent investment plans in case of falling interest rate where there is increase in price with fall in yields. This is when there is increase in NAV. You may choose to invest in Gilt funds when there is a dip in interest rate.
Fixed maturity schemes
These are forms of debt funds with closed ends. Here the maturity period is of the range 1 month and 5 years. The money you invest will in turn be invested in deposits, corporate bonds of ‘AAA’ ratings, bank FDs, commercial papers or money market instruments. This is very much suitable for investors who are not ready to risk. When you aim at investing for a specific time period in order to cater to your financial goals, you may opopt for investing in FMPs. For regular returns and flexible income for elders and retired individuals, this will be a very suitable investment plan. You can save a lot on taxes when you belong very high income category.
Factors to consider before you decide to invest in these funds
Asset composition
The funds will be invested in various ways such as corporate bonds, money market instruments, government securities, cash, and so on. Hence, be aware of the composition and it will be helpful in predicting and understanding the strategy.
Maturity
Maturity of all the holdings of funding will be clearly seen here. With this, one can abide by the interest rate risk involved.
Credit quality
According to the investment strategy of the scheme, these funds shall be invested in securities of various credit ratings. These are indicative of the borrower’s creditworthiness. With higher rating, higher creditworthiness is evident.
Decent return
There is very high returns with money market funds as compared to savings accounts where high liquidity is enjoyed. When there is excessive cash in SB account, you may choose for money market funds for investing.
Verify track record of the scheme
A few debt funds are better in terms of navigating bull markets as compared to others. Hence, check out the track record over a stipulated time period before making an investment.
