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Money Market Fund

Money market mutual funds (MMF) 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 or investment with minimal to low risk. As these funds invest in high-quality instruments, they offer a predictable risk-free return rate.

Types of Money Market Instruments:

Following are the most popular money market instruments:

a. Certificate of Deposit (CD)

  • These are time deposits such as fixed deposits that are offered by scheduled commercial banks. The only difference between FD and CD is that investors are not allowed to withdraw CD until maturity.

b. Commercial Paper (CPs)

  • These are issued by companies and financial institutions which have a high credit rating. Commercial papers are also known as promissory notes, commercial papers are unsecured instruments, which are issued at the discounted rate and redeemed at face value.

c. Treasury Bills (T-bills)

  • 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.

d. Repurchase Agreements (Repos)

  • It is an agreement under which RBI lends money to commercial banks. It involves the sale and purchase of agreement at the same time.

Suitability:

Those individuals with low-risk appetite having their surplus cash parked in a savings bank account can invest in money market funds. These funds have the potential to offer higher returns than a regular savings bank account. The investors could be corporate as well as retail investors.

Minimum Investment:

The minimum investment varies from scheme to scheme. It could range between Rs.100/ – to Rs.5,000/ -.

Taxability:

  • • If an investor has made an investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor.
  • • If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.
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