What is Money Market Fund, Meaning, Risk, Returns, Benefits, Components and Examples

June 17, 2025

What is Money Market Fund?

Money market funds are a category of mutual funds that invest primarily in high-quality, short-term debt instruments such as treasury bills, certificates of deposit, commercial paper, and repurchase agreements. These funds aim to deliver stable returns over a horizon of up to one year, while maintaining strong liquidity and preserving investors’ capital.

Definition of Money Market Fund

Formally, a money market fund is a debt mutual fund scheme that pools investor capital to purchase money market instruments securities with maturities typically not exceeding 365 days. By law, these funds must maintain a weighted average maturity of their portfolio that does not exceed one year, ensuring low volatility and high liquidity.

Meaning of Money Market Fund

In simpler terms, a money market fund acts like a professionally managed cash management vehicle. Investors can park surplus cash in these funds for short durations often for a few weeks to several months and earn a return that usually surpasses that of a regular savings account, without locking in their money for the long term.

How Does Money Market Fund Work?

A money market fund operates through the following steps:

Pooling Capital: Investors subscribe to units of the fund, contributing their money into a collective pool.
Asset Allocation: Fund managers invest this pool in a diversified mix of high-quality, short-term instruments such as treasury bills, certificates of deposit, commercial paper, and repos guided by SEBI’s debt fund regulations.
Income Generation: These instruments generate interest income, which accrues daily and is typically reflected in the fund’s Net Asset Value (NAV).
Maintaining Liquidity: Investors can redeem units on any business day, with proceeds credited to their bank accounts usually within one to three working days. This liquidity makes money market funds ideal for emergency funds or short-term parking of surplus cash.
Regulatory Oversight: The Reserve Bank of India regulates the underlying money market, while SEBI oversees mutual funds, ensuring transparency, risk controls, and investor protection.

Types of Money Market Fund

Money market funds invest in a variety of money market instruments, each serving different purposes:

Treasury Bills (T-Bills): Government-issued securities with maturities up to 365 days, sold at a discount and redeemed at face value.
Certificates of Deposit (CDs): Negotiable term deposits from scheduled banks, typically with maturities ranging from 7 days to one year.
Commercial Paper (CP): Unsecured promissory notes issued by corporations for very short periods (up to 365 days).
Repurchase Agreements (Repos): Short-term collateralized loans secured by government securities, often used by banks for overnight funding.
Call and Notice Money: Inter-bank loans for durations from one day (call money) up to 14 days (notice money), serving as reference rates for short-term liquidity.

Benefits of Money Market Fund

Investing in money market funds offers several advantages for Indian investors:

Capital Preservation: By investing in high-quality instruments, these funds focus on minimizing the risk of principal loss.
High Liquidity: Daily fund redemptions allow easy access to cash, making them suitable for emergency funds or short-term financial goals.
Better Returns than Bank Deposits: Typically, money market funds deliver yields that exceed traditional savings accounts and short-term fixed deposits, especially in a rising interest-rate environment.
Low Volatility: The short maturities of the underlying instruments result in minimal NAV fluctuation, offering stability during market turbulence.
Professional Management: Experienced fund managers actively adjust the portfolio’s duration and credit exposure to optimize returns and control risks.

Features of Money Market Fund

Key characteristics that distinguish money market funds include:

Short Maturity Profile: The average portfolio maturity does not exceed one year, ensuring low interest-rate risk.
Diversification: Spread across various issuers and instruments to reduce credit and concentration risks.
Regulatory Oversight: SEBI’s mutual fund regulations mandate strict risk-management protocols, portfolio limits, and disclosure norms.
Daily NAV Pricing: Reflecting accrued interest, the NAV updates every business day based on the fund’s performance.
No Exit Loads (Usually): Most money market funds impose no exit load on redemption, enhancing liquidity for investors.

Examples of Money Market Fund

Several well-known schemes illustrate the diversity and scale of money market funds in India:

Franklin India Money Market Fund: Delivered a compound annual growth rate (CAGR) of 7.14% over 23 years, turning a ₹10,000 monthly SIP into approximately ₹70 lakh.
HDFC Money Market Fund: One of the largest schemes with an AUM exceeding ₹31,700 crore and a five-year annualized return of around 6.96%.
ICICI Prudential Money Market Fund: AUM of ₹30,001 crore with a five-year return near 6.90% p.a.
Aditya Birla Sun Life Money Manager Fund: Known for consistent performance, with a five-year CAGR of about 7.04%.

Components of Money Market Fund

The primary components that form a money market fund’s portfolio are:

Government Securities: T-Bills issued by the Government of India for up to 365 days.
Bank Instruments: CDs and call money sourced from scheduled banks.
Corporate Papers: CPs from high-credit-rating corporations.
Collateralized Borrowing: Repos backed by government securities.
Cash and Cash Equivalents: A small portion may be held in cash for meeting redemption obligations.

Objectives of Money Market Funds

The overarching goals of money market funds are:

Capital Preservation: Protect the principal by investing in low-risk, high-credit-quality instruments.
Liquidity: Provide daily access to funds without penalty, supporting short-term financial needs.
Reasonable Returns: Generate income that outpaces savings accounts and short-term deposits, compensating investors for minimal risk.
Stability: Keep NAV fluctuations minimal to offer predictability in returns.

Taxation Rules of Money Market Funds

Money market funds in India are taxed under the debt funds category, with the following rules for FY 2025-26:

Short-Term Capital Gains (STCG): If units are held for up to 36 months, gains are added to the investor’s income and taxed at the applicable slab rate.
Long-Term Capital Gains (LTCG): For holdings beyond 36 months, gains are taxed at 20% with indexation benefits for units purchased before April 1, 2023.
Post-April 1, 2023 Investments: All capital gains regardless of holding period are now treated as STCG and taxed as per slab rates, with no indexation benefit.

How to Find Out Best Money Market Fund?

When selecting a money market fund, evaluate these criteria:

Expense Ratio: Lower fees enhance net returns.
AUM (Fund Size): Larger AUM often indicates operational stability and economies of scale.
Yield History: Compare five-year and three-year annualized returns to gauge consistency.
Credit Quality: Ensure the fund holds predominantly top-rated instruments (AAA or Sovereign).
Liquidity Terms: Look for funds with T+1 settlement and no exit loads.
Fund Manager Track Record: Experienced managers can navigate interest-rate cycles more effectively.
Portfolio Composition: Check the percentage allocation to T-Bills, CDs, CPs, and Repos.

List of Money Market Funds in India

There are 24 active money market funds in India, including:

Tata Money Market Fund
Nippon India Money Market Fund
Axis Money Market Fund
Aditya Birla Sun Life Money Manager Fund
UTI Money Market Fund
HDFC Money Market Fund
ICICI Prudential Money Market Fund
Kotak Money Market Fund
SBI Savings Fund
Franklin India Money Market Fund
Bandhan Money Manager Fund
PGIM India Money Market Fund
HSBC Money Market Fund
Invesco India Money Market Fund
Sundaram Money Market Fund
Edelweiss Money Market Fund
DSP Savings Fund
Baroda BNP Paribas Money Market Fund
Bajaj Finserv Money Market Fund
Bank of India Money Market Fund
LIC MF Money Market Fund
Mirae Asset Money Market Fund
TRUSTMF Money Market Fund
Union Money Market Fund

Best Tips to Consider Before Investing in Money Market Funds

Define Your Horizon: Use money market funds for 3-12 month goals to maximize stability.
Monitor Yield Trends: Invest when fund yields are close to or above prevailing bank deposit rates.
Check Fund House Credentials: Prefer AMCs registered with SEBI and with strong credit-rating track records.
Review Expense Ratios Annually: A marginal difference in fees can significantly affect returns over time.
Stay Updated on Policy Changes: Tax and regulatory amendments (e.g., post-April 2023) can impact post-tax returns.

What are the Returns on Money Market Funds?

Money market funds in India have delivered average annualized returns of around 7.5% over the past five years, outperforming comparable bank deposits. Older schemes like Franklin India Money Market Fund have even achieved 7.14% CAGR over more than two decades.

Who Should Invest in Money Market Funds?

Conservative Investors: Those prioritizing capital preservation over high returns.
Short-Term Planners: Individuals saving for near-term expenses such as taxes, insurance premiums, or weddings.
Business Owners: Corporates looking to park surplus working capital temporarily.
Risk-Averse Retirees: Seeking regular income with minimal volatility.

Why to Invest in Money Market Funds?

Investors choose money market funds to:

Preserve Capital: Secure your corpus in instruments with minimal default risk.
Maintain Liquidity: Access funds on demand without lock-in penalties.
Earn Competitive Yields: Achieve returns superior to savings accounts, especially during rate upcycles.

When to Invest in Money Market Funds?

Interest-Rate Rising Cycles: Funds can repr ice holdings quickly, capturing higher short-term yields.
Before Major Expenses: Park cash here pending large payments to avoid idle bank balances.
Market Volatility Periods: Use as a safe haven during equity or long-duration debt market downturns.

Why to Consider Money Market Funds in Your Portfolio?

Diversification Tool: Complements equities and longer-duration debt by adding stability.
Liquidity Buffer: Acts as a cash reserve for systematic investment plans (SIPs) or emergency needs.
Risk Management: Helps reduce overall portfolio volatility while still earning a market-linked yield.

How to Invest in Money Market Funds?

Complete KYC: Submit identity and address proofs to a chosen fund house or platform.
Select the Scheme: Compare funds based on AUM, returns, credit quality, and expense ratio.
Choose Investment Mode: Opt for lump-sum or SIP (Systematic Investment Plan) as per convenience.
Place the Order: Invest via AMC’s website, a fintech platform, or your bank’s online portal.
Track and Redeem: Monitor performance and redeem units when funds are needed; redemption proceeds usually credit within 1-3 business days.

Risks Involved with Money Market Funds

While generally low-risk, money market funds carry:

Credit Risk: Possibility of default by issuers of commercial paper or certificates of deposit.
Interest-Rate Risk: Short-term rates can fluctuate, affecting yields and NAV slightly.
Liquidity Risk: In rare stress scenarios, mass redemptions may lead to temporary delays in payouts.

Money Market Fund vs. Money Market Account

Although their names sound similar, they differ significantly:

Provider:

Fund: Offered by asset management companies; not insured.
Account: Offered by banks/credit unions; FDIC/NCUA-insured up to specified limits.

Investment Vehicle:

Fund: Pooled investments in debt securities.
Account: Bank deposit that pays interest on your balance.

Returns & Risk:

Fund: Typically, higher yields but no government insurance; NAV may fluctuate slightly.
Account: Lower but guaranteed interest rates; principal secured up to insurance limits.

Liquidity & Access:

Fund: Redemption settlement T+1/T+2; may have transaction cut-off times.
Account: Immediate access via checks, debit cards, or transfers, subject to withdrawal limits.

Summary

Money market funds are short-term debt mutual funds designed for capital preservation and liquidity.
They invest in instruments like T-Bills, CDs, CPs, and repos with maturities up to one year.
Key benefits include high liquidity, low volatility, and yields superior to savings accounts.
Taxation treats them as debt funds: STCG taxed at slab rates (≤36 months); LTCG taxed at 20% with indexation (>36 months), but post-April 2023 gains are all STCG.
Selection criteria: expense ratio, AUM, yield history, credit quality, and fund manager expertise.
A diverse list of 24 schemes is available in India, with average five-year returns around 7.5% p.a.
Money market funds suit conservative, short-term, and liquidity-focused investors and can play a key role in portfolio diversification.