Normally money market funds and liquid funds are used interchangeably for mutual fund investors. The idea of money market funds is to restrict the investment portfolio to assets with a very short term maturity profile of less than 91 days. That is the typical profile of a money market fund with a large chunk of its assets deployed in assets with a residual maturity of less than 60 days. By holding assets with maturity of less than 60 days, money market funds can avoid the mark-to market risk that most long-term debt funds run.
So, what are the benefits of money market mutual funds and what are the risks of money market funds? How do money market funds work and for whom is it suitable? Typically, you do not see retail investors putting money in money market funds. It is institutions, corporates and banks who typically park money in money market mutual funds. These funds will invest in instruments like call money, CBLO, repo, reverse repo, commercial paper and certificates of deposit.

What returns to expect from money market funds
Remember that money market funds are extremely liquid and are therefore classified as near-cash instruments. Hence in terms of returns and risk they are comparable to savings bank accounts where one can enter and exit at very short notice. Most money market funds offer same day redemption credit to fund holders. Since they invest in government backed debt of very short maturity, these money market funds are immune to default risk and to interest rate risk too. If one looks at the table below as per CRISIL ranking of money market mutual funds, the average annualized returns on a money market mutual fund is to the tune of 6.5-6.8% in a best case scenario..

How are money market fund yields likely to behave going ahead?


How the money market yields are trending downwards