Money Market funds: 6-12 month low-risk investors may consider them

They fall less when interest rates rise, but also rise less in a declining rate environment

Investors seeking relatively safe fixed-income options with liquidity may find money market funds (MMFs) attractive. These schemes have delivered a 6.97 per cent return over the past year.

 

Money market funds invest in money market instruments maturing in less than one year. “MMF is a type of debt mutual fund that invests in very short-term and high-quality financial instruments. They are designed for investors who want to park surplus money for a short period, usually a few weeks to a few months, while aiming for better risk-adjusted returns. These funds focus on capital preservation, liquidity, and stable returns rather than high growth,” says Amit Modani, senior fund manager – lead, fixed income, Shriram Asset Management Company (AMC).

 

Money market funds have also gained scale. As of January 31, 2025, the category was the second-largest among debt funds, with assets under management (AUM) of ~3.32 trillion, next only to liquid funds at ~5.37 trillion, according to Association of Mutual Funds in India (AMFI) data.

 

Reasonable returns

 

Money market funds can offer reasonable accrual income without taking much interest rate risk. “MMFs typically invest in commercial papers (CPs), certificates of deposit (CDs) and treasury bills (T-bills). They have a weighted average maturity of 3–9 months. They offer high-quality portfolios with diversification. Currently, MMFs with a weighted average maturity of 6–9 months can yield around 7.2–7.5 per cent per annum,  compared to the repo rate, which stands at 5.25 per cent. That means clients are earning around 200 basis points more than overnight funds. This is attractive for clients with an investment horizon of at least 3 months,” says Dhawal Dalal, president and chief investment officer-fixed income, Edelweiss Mutual Fund.

 

“A relatively high spread over the repo rate makes the accrual level of MMFs that much better,” says Joydeep Sen, corporate trainer (debt) and author.

 

Low interest rate sensitivity

 

With portfolios concentrated in short-maturity instruments, MMFs typically carry lower interest rate sensitivity than longer-duration debt funds. “As these funds invest in instruments with short maturity, their interest rate risk is low, making them suitable for conservative investors, corporates managing idle cash, or individuals building an emergency or short-term parking portfolio,” says Modani.

 

“Given the relatively flat term premium between 1-year CDs and 2–3-year  AAA CPSE bonds at the moment, we believe MMFs offer a great combination of 7 per cent plus yield, liquidity and diversification with relatively lower interest rate risk as compared to other fixed income funds with maturity of more than two years,” says Dalal.

 

Risks to account for

 

MMFs are not entirely without risks. “MMFs are market-linked products and do not offer guaranteed returns. They carry interest-rate risk, liquidity risk, and credit risk. Also, reinvestment risk occurs when instruments mature, and fund managers may have to reinvest at lower interest rates, potentially reducing future returns,” says Modani.

 

“While default risk exists, usually fund houses run good credit quality portfolios. Also, return expectation is marginally lower than in usual debt funds. When the debt market is rallying, other debt funds can give much better returns than MMFs,” says Sen.

 

For conservative investors

 

MMFs may suit conservative investors with a short- to medium-term view. “MMFs are suitable for investors who prioritise liquidity, capital preservation, and short-term risk-adjusted returns. They may be ideal for conservative investors with a low to moderate risk appetite, and short-term investors with surplus funds for brief periods, and HNIs looking to temporarily deploy large sums,” says Modani.

 

Investors with a 6–12 month horizon can consider these schemes. They should align their holding period with the fund’s maturity profile. While selecting a scheme, investors should factor in the expense ratio—lower is better.            Single-digit return  

Period	Return (%)
1-year	7.0
3-year	7.2
5-year	6.0
10-year	6.5

Source: pbcs.in   

The writer is a Gurugram-based independent journalist