A marketplace for assets with a short-term maturity of approximately one year is known as a money market. A money market, which consists of banks, non-banking financial institutions, and acceptability institutions, allows the exchange of short-term funds while also ensuring that the market has the right amount of liquidity.
Money market mutual funds (MMF) make investments in highly rated relatively brief financial securities, money, and cash accounts. Because of this, money market mutual funds are seen as secure investments or ones with little to no risk. These funds provide a consistent rate of threat-free return.
A money-market fund maintains a very well array of monetary instruments in an effort to provide the maximum short-term income possible. These funds are open to investors with short investment horizons of up to one year.
People with a limited tolerance for risk who have extra money stashed away in a savings account can invest in money market funds. These investments may provide better returns than a typical savings account. Both corporate and retail investors can be investors in money market funds. Money market funds won’t be the best choice if you have a medium- to long-term investing goal.
The most common money market funds are as follows:
Scheduled commercial banks provide these time deposits, such as fixed deposits. The sole distinction between FD and CD is that investors cannot withdraw money from CDs until they have reached maturity.
These have a high credit rating and are issued by businesses and financial organizations. Financial assets, commonly referred to as promissory notes, are unsecured financial instruments that are issued at a reduction and redeemed for their current prices.
The Government of India issues T-bills to raise funds for a short term of up to 365 days. The government approves Treasury bills, making them one of the finest financial products. T-bills have a low annualized rate of return, commonly referred to as the risk-free rate, when compared to all other financial instruments.
Under the terms of the agreement, the RBI lends money to financial institutions. It entails concurrently selling and buying an agreement.
Dividend income and capital gains are the 2 methods shareholders can profit from money market funds. Owners will pay tax on dividends according to their tax bracket starting in the fiscal year. The discrepancy between the cost of units bought and the price they were reclaimed or sold is known as a capital gain. Depending on how long an investor holds the funds, capital gains may be taxed as either short- or long-term capital gains.
Capital gains on redemption or sale are regarded as short-term capital gains if an investor purchases onto their investment for less than three years and are taxable at the investor’s relevant income tax slabs rate.
Long-term capital gains: An investor would receive the benefit of “indexation” when a money market fund is liquidated or redeemed after already being held for longer than three years. This implies that before determining the capital gain, the purchase price is adjusted to take inflation into account (using a government-provided index). The current tax rate on long-term capital gains is 20%
The market price of all the shares owned by the mutual fund program is known as net asset value (NAV). A mutual fund program’s profitability would be indicated by its NAV or its net asset value. The market price of the assets in the mutual fund program divided by the total of shares in the mutual fund program on any given date will give you the NAV per unit of the mutual fund.
Listed below are some of the money market mutual fund main benefits.
In terms of risk, they are relatively low. You can engage in money market funds if you select low-risk investments.
In terms of returns, they are somewhat superior to bank savings accounts. Money market funds offer excellent returns when compared to other cash substitutes. However, it relies on Net Asset Value (NAV), which fluctuates in response to changes in the money markets’ liquidity.
Money market funds focus solely on liquidity. Simply said, you can typically withdraw your funds with little or no capital impact on the same day or, at most, the following day. Additionally, it is practical to have the freedom to withdraw money from money market funds without incurring exit fees. You now have convenient access to money anytime you need it.
Let’s now discuss the drawbacks of keeping your funds in a money market fund.
When inflation is running at 4% and an investor’s money market account yields a 3% return, the owner is effectively losing buying power annually.
Even tiny annual fees can take up a sizable portion of the profit when investors are earning 2% or 3% in a money market account. Money market investors may find it more challenging to keep up with inflation as a result of this. The detrimental effect of fees on returns might vary depending on the accounts or fund.
Money market funds might incur some uncertainties in order to provide their clients with higher yields, even though they typically invest in government securities and other assets that are regarded as being quite secure.
By following the instructions listed below, you can invest in money market funds with Jupiter Money in a hassle-free and paperless manner:
Step 1: Go to the Jupiter Money app and sign up for an investment account.
Step 2: Fill out the necessary information.
Step 3: Finish your KYC; the entire procedure can be finished in five minutes.
Step 4: Select and put money into the best money market fund.
Money market funds are now one of the fundamental supports of the modern financial markets. They provide a balanced, expertly managed strategy with reasonably high volatility for clients.
Money market funds mature after one year, but liquid funds take 91 days longer. A class of mutual funds known as “liquid funds” invests in money market securities for a relatively short period of time.
Money market funds are indeed very liquid investments. These assets are very highly liquid because of their short maturity periods and ease of purchase and sale.
Money market funds are fixed-income investment products that provide a fixed interest rate set by the RBI. These instruments also distribute their profits in the form of dividends, which are not tax-deductible.
The RBI sets the interest rate for money market funds, which is typically determined daily. At the conclusion of each month, this interest sum is transferred directly into the accounts.