Originally posted on September 8, 2017, updated on 24.11.2023
Money market mutual funds (MMMFs) are mutual funds that exclusively invest in short-term debt instruments, cash, and cash equivalents that are rated high quality. It is for this reason that money market mutual funds are considered safe investments with minimal to low risk. As these funds invest in high-quality instruments, they offer a predictable risk-free return rate.
A money market mutual fund tries to offer the highest short-term income by maintaining a well-diversified portfolio of money market instruments. Investors having a short investment horizon of up to one year may invest in these funds. These schemes tend to give better returns than Bank Fixed Deposits of similar duration
The scheduled commercial banks and the general mutual funds or their subsidiaries engaged in funds management may set up MMMF either as Money Market Deposit Accounts or Money Market Mutual Funds with the permission of RBI. The private mutual funds that have floated separate Asset Management Companies are under SEBI regulations if they deal in capital market instruments.
The resource mobilized by MMMFs is permitted to invest up to the maximum level in the following money market instruments.
- In Treasury Bills and Dated Government Securities having unexpired maturity period up to one year: 25% [ T-bills are issued by the Government of India to raise money for a short-term of up to 365 days. Treasury bills are considered one of the safest instruments as the government backs these. The rate of return, also known as the risk-free rate, is low on T-bills as compared to all other instruments.The securities are known as dated securities, as the maturity date is expressed clearly in these debt instruments. They can have a tenure ranging from five to forty years. The interest rate is paid half-yearly on the investment’s face value, and the principal amount is repaid on a predetermined date.]
- Call/notice money: 30% [‘Call Money’ is the borrowing or lending of funds for 1day. Where money is borrowed or lent for the period between 2 days and 14 days it is known as ‘Notice Money’. ‘Term Money’ refers to borrowing/lending of funds for a period exceeding 14 days.]
- Commercial Papers (exposure in the company should not be more than 3%): 15% [[Commercial Paper (CPs) is issued by companies and financial institutions for their working capital needs which have a high credit rating. Commercial papers are also known as promissory notes, commercial papers are unsecured instruments, that are issued at a discounted rate and redeemed at face value. It provides a cost-effective way of raising funds for 7 days up to a year and can be issued in a denomination of ₹ 5 lakhs or multiples thereof.]
- Commercial Bills accepted/co-accepted by the banks: 20% [Under this facility banks accept commercial usance bills drawn on their constituents which would enable the latter to enjoy credit which otherwise the seller will not be willing to extend. A commercial bill also helps seller companies get advance payment for the invoices they raise after making sales to their customers. Commercial bills are issued for financing needs of the medium term.
- Certificate of deposits: No limit [ Certificate of Deposit is a short-term investment that comes with fixed investment amounts with an agreed rate of interest and maturity tenure ranging between 1-3 years. The deposit amount will be in multiples of lakhs. There will be an agreement made between the depositors and the banks, wherein the bank pays an interest on your investment.
Money Market Mutual Funds (MMMFs) enable individual investors to participate in the money market. The above limits are fixed with a view to ensuring safety and liquidity for individual investors.
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