Money Market funds are fixed-income instruments that invest in money market securities such as commercial paper, treasury bills, municipal bills, etc. These funds offer a maturity period of 12 months because of which they involve low risk. Apart from this, these funds provide income in the form of dividends. The objective of these funds is to fulfil high liquidity needs and provide stability and certainty. This article discusses the role of a money market fund in finance which can be referred to by anyone who's looking for low-risk investment alternatives.
Types of Money Market Funds
Money market funds are mainly of four types, namely, treasury bills, certificates of deposit, commercial paper, and repurchase agreements. These types are explained below in detail:
Treasury Bills
They are issued by the government for a short period of around a year. They are considered the safest investment options because they're backed by the government but offer low returns.
Certificate of Deposit
They are a kind of fixed-income financial tool offered by RBI. It's an agreement between a depositor and a bank where the bank promises to pay interest on your investment.
Commercial Paper
They are a kind of promissory notes and are unsecured instruments which are issued at a discount but redeemed at face value.
Repurchase Agreement
Through these agreements, RBI lends money to commercial banks. It also involves lending money between banks as well.
Role of Money Market Funds in Finance
Before making any kind of investment one must conduct thorough research of various investment alternatives available. This is because one aims to receive some returns from their investment. Money market funds are one of those investments which provide some returns and the role they play in helping you get finance is mentioned below.
Quick Access to Cash
Money market funds invest in highly liquid, short-term debt instruments such as treasuries, commercial paper, and certificates of deposits. This approach allows your capital to be productively deployed, potentially generating appreciable returns on your investments.
Low Risk
Money market funds involve low risk which offers low-risk investment opportunities. Their main goal is to provide stable net asset value which makes them a safer investment option in comparison to other mutual funds.
Income Generating Opportunities
These funds don't help in capital appreciation but help with generating income through dividends.
Diversification
Investing in short-term debt instruments offers risk diversification. This is because these funds invest money in different types of funds which involve different types of risk. This spreads risks among different issuers and instruments.
Cash Management
Money market funds are often used for cash management purposes. They do this by providing quick access to funds which helps to meet short-term financial needs. These funds are initially allocated for retention purposes, with the intention of subsequent strategic investment.
Conclusion
Money market funds are fixed-income instruments which invest in money market securities. These securities are of different types such as treasury bills, certificates of deposit, commercial paper, and repurchase agreements. Nevertheless, many individuals lack awareness regarding the appropriate platforms through which investments in such funds can be facilitated. Some of the well-known financial institutions such as Axis Mutual Funds offer these funds for investment with ease. Knowing the right platforms is essential but understanding these fund's role in finance is equally important. They help with quick access to cash, offer low-risk, provide decent income-generating opportunities and help with risk diversification as well.
