Conservative investors often seek fixed-income instruments to preserve their capital. So, as an investor with a low-risk tolerance, if you’re looking for investment avenues with consistent returns while ensuring liquidity, money market funds (MMFs) are suitable for you.
Especially when making short-term investments, MMFs are ideal since they invest in high quality rated debt instruments. Here are 5 reasons why MMFs make a good investment choice.
But first, let’s understand MMFs.
How do money market mutual funds work?
Money market debt mutual funds (MFs) invest in money market securities, including treasury bills, government bonds, etc. These short-term debt securities and debt-related instruments usually have an average maturity of one year. Here, money market instruments are short-term assets issued and traded in the money market.
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Why invest in MMFs?
#1 For a low-risk investment
Money market MFs carry the risks applicable to debt funds like credit risk and interest rate risk, making the investments relatively low risk or moderately risky. Besides, since the schemes hold securities with maturities worth a year, they typically offer stable returns at low volatility.
Unlike ultra-short or low duration funds, money market funds don’t hold lower-rated debt securities for pushing up yields. This way, the low credit risk makes the fund comparatively less volatile.
#2 For better returns on short-term surpluses
Since these schemes invest in money market instruments, if you have idle cash lying around, this investment can fetch you better returns. However, before investing, ensure that you have a short-term cash surplus for urgent financial needs.
As money market debt funds offer stable returns, they are well suited for you to park your surplus for shorter terms ranging from one month to one year. This way, your invested corpus will likely remain safe and collect market yields until it matures.
#3 For steady returns
Money market mutual funds invest in highly liquid securities, offering steady returns whenever the interest rate cycles tighten and ease. Here, when there’s a spike in market rates, money market MFs provide returns through high-interest income. Contrarily, when market rates drop, the funds generate capital gains, making up for the relatively lower interest income.
#4 For regular interest income
As a conservative investor, if you’re seeking consistent income generation in the short term, MMFs serve the purpose. Besides providing regular income, the schemes offer stability and high liquidity. So, when you allocate a section of your portfolio to these schemes, you can use a systematic withdrawal plan for building a stream of income flows.
#5 For an alternate savings instrument
Since MMFs generate income via interest payments and capital gains on debt holdings, they comparatively collect more returns than savings deposits. So, by investing in short-term money market securities, you can preserve your capital and route the corpus into other long-term funds when the funds mature.
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Over to you
As an investor with a low or moderate risk appetite, investing in MMFs can be a smart choice. Start your investment journey today with Tata Capital’s Moneyfy app! Keep a watch on the market, compare multiple schemes, and choose the suitable scheme as per your investment objective and risk profile.