Money Market Mutual Funds

The Reserve Bank of India (RBI) has recently raised concerns over increase in assets of money market mutual funds (MMMFs). The RBI is concerned that in the past few months the assets have increased significantly. Further, concerns were raised over the infusion of liquidity which has declined sharply in term rates amid the COVID-19 Pandemic.

Implications

  • This is creating a fear among institutional investors, specifically in illiquid investments to earn targeted returns.
  • This could lead to build-up of financial vulnerabilities that have adverse implications on the financial stability.

What Is a Money Market Mutual Fund?

  • It is a kind of mutual fund that invests in highly liquid, near-term instruments such as cash and cash equivalent securities.
  • The instruments also include high-credit-rating and debt-based securities with a short-term.
  • The Money market funds offer the investors a very high liquidity with a low level of risk.
  • The Money market mutual funds are also called money market funds.
  • It is the type of an investment which is sponsored by an investment fund company. Thus, it has no guarantee of principal.
  • This money market fund is different then the Money Market Account.
  • It is not as safe as cash but the money market funds are considered to have extremely low-risk on the investment side.
  • It can generate income either the taxable or tax-free. But they are having little capital appreciation.
  • These funds should be used as a place to park money temporarily. Money can be parked here before investing elsewhere or making an anticipated cash outlay.
  • Long-term investments are not suitable with these funds.

Advantages of MMMFs

  • It competes with the similar investment options like bank money market accounts and enhanced cash funds.
  • One can invest in a wider variety of assets and can aim for higher returns.
  • It provides the investors a safe place for investing in secure and highly liquid, cash-equivalent, debt-based assets through smaller investment amounts.
  • They have a very low-risk.
  • It has no entry and exit charges so it attracts the users.

Disadvantages of MMMFs

  • They have a low-return investment.
  • Investors park substantial amounts of cash for the short-term. Since, it is not suitable for long term investment goals such as retirement planning because they do not offer capital appreciation.
  • It is sensitive to Interest rate fluctuations and monetary policy.

Money Market Account

It is an interest-earning savings account. These accounts are offered by financial institutions and are insured by the Federal Deposit Insurance Corporation (FDIC). Money Market account have limited transaction privileges.

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