Money Market Mutual Funds are in existence for over 20 years now, however, is one of the less known and extremely under penetrated Mutual-Fund category as far as Individual investors are concerned.
Majority of the individuals still have the impression that Mutual Funds means Equities, hence risky and volatile and are not even aware that Money-market Mutual Funds and other categories which offer relatively less market-linked volatility vis-a-vis equities do exist.
Besides lack of awareness of Individuals, various sales and distribution channels are also equally responsible for low penetration of Money Market Mutual funds, however, in the last few years or so there is a genuine attempt from the industry participants to create awareness about these funds.
Money Market Mutual Funds are perfect add-on supplements to Savings A/c and less than 1 year FDs to park your short term cash surpluses
What is Money Market?
Money market is a marketplace where large institutions and government entities buy and sell money to address and manage their short term cash requirements.
Scheduled Commercial Banks (SCBs), Financial Institutions (NBFCs), Corporate Institutions, RBI, State Government, Central Government, FIIs, Insurance Companies and Mutual Funds are all part of Money Market activity.
Mutual Funds that are dedicated to the above Money market related activities are called Money Market Mutual Funds.
Money Market Mutual Funds typically invests in high-quality short term debt securities of less than 1 year duration.
They are further divided into 2 sub-categories:
Liquid Mutual Funds: invest in short-term debt securities not exceeding 60 days and there is no mark-to-market requirement for daily NAVs for such funds and NAV valuation is done on accrual basis by adding the interest coupon accrued for the day.
Typical average portfolio duration of Liquid Mutual Funds is around 30 days
Ultra Short Term Mutual Funds: can also invest proportion of their AUM in short-term debt securities exceeding 60 days and such proportion has a mark-to-market requirement for daily NAVs and are subject to some volatility based on interest-rate movement in the market.
Typical average portfolio duration of Ultra Short Term Mutual Funds is around 180 days
|Certificate of Deposits (CDs)||Scheduled Commercial Banks (SCBs)||7 days to 1 year|
|Commercial Paper (CPs)||Corporate||7 days to 1 year|
|Govt of India (through RBI)||91/182/364 days|
|PSU Bonds||PSUs||Remaining duration of less than 1 year|
|Corporate Debentures||Corporates||Remaining duration of less than 1 year|
|Call Money||None||Un-secured overnight borrowing & lending (especially by banks)|
Corporates, some Banks/FIs and FIIs are already using Money Market Mutual Funds to park their short-term cash surplus and accounts for 1,08,755 Crore AUM, whereas,
Individuals (Retail and HNIs) accounts for only 14,000 Crore AUM
Above AUM data is upto Sep 2013.
How Money Market Mutual Funds stands vis-a-vis Savings A/c and short term FDs?
Safety – Relatively similar to Savings A/c and short-term FDs with negligible or extremely less volatility
Liquidity – Similar to Savings A/c and superior to short-term FDs, you can even maintain a ZERO-balance folio with no penalty or charges.
Returns – Reasonably high probability to generate superior returns compared to Saving A/c and short-term FDs. Gains gets accumulated on a daily-basis compared to quarterly interest accumulation in Savings A/c and Fixed deposits.
Tax Advantage – Superior tax treatment if you fall under 30% tax bracket (Dividend-reinvest option)
Some Ultra Short Term Funds do go overboard by adding some tactical % of Debentures/Bonds beyond 1 year duration while maintaining overall average portfolio duration within 180 days. Hence, knowing the portfolio composition and identifying the right mix of funds based on individual’s comfort-level is important!