Mutual Fund Unlocked: Money market mutual funds
Today, various types of funds are operating in the mutual fund space. These mutual funds invest in various asset classes for attaining different investment objective. Some are debt funds, some are pure equity funds, also there are funds who invests in the money market instruments. The funds which invest solely into the money market securities are money market mutual funds. These investments are short-term and very liquid investments.
The sole objective of these funds is to earn the interest for the shareholders. These funds provide low risk low return avenue for investors. Moreover, as these funds invest into the securities with a higher credit rating, it also serves as safe place to park the money in the shorter run. Owing to the low return profile, these investment are not suitable for the investors looking for the medium or long-term investment.
These funds are good investment tools for the investors who are more interested and looking for comparatively safer investment options. Many financial institutions approach money market mutual funds to manage their short-term liquidity. The portfolio of these funds comprises of short-term debts, tax-free bonds and T-bills etc.
On the returns front, these funds score well over bank deposits. But performance of these fund is highly dependent on the interest rate changes. So its not like that these funds will always garner higher returns, but probability of getting higher returns than banks is more. So investors are advised to be aware about the interest rate environment before investing into these funds.
These funds are easily accessible and can be withdrawn anytime without any penalty. Institutional money market funds and retail money market funds are the two available types of money market funds. Institutional funds are held by the governments and institutional investors, meanwhile retail funds are the funds where individual investor can park their surplus cash.
On the taxation front, these funds are treated as debt funds. The tax liability depends on the holding period of the fund. Investor books a Short-term Capital Gain (STCG) when he exits investment prior to the period of 3 years.
Similarly, Long-term Capital Gains (LTCG) are applicable when an investor stays invested for more than 3 years. The gains realised within 3 years are added to the investors income and taxed as per the respective tax slab of the investors as well as the long term gains which are realised after 3 years are taxed at the rate of 20 per cent after the indexation.