Investors with a 6 to 12 month horizon may consider them. They should align their holding period with the fund's maturity profile and prefer schemes with a lower expense ratio.
Key Points
- Money Market Funds (MMFs) are short-term debt mutual funds investing in instruments maturing within one year.
- The category has delivered average returns of 6.6% over the past year, making it attractive for conservative investors seeking relatively stable income.
- Suitable for parking surplus funds for 3 to 12 months, emergency corpus allocation, and corporate treasury management.
Investors seeking relatively safe fixed-income options with liquidity may find money market funds (MMFs) attractive. These schemes have delivered category average returns of 6.6 per cent over the past year.
MMFs invest in money market instruments maturing in less than one year.
"These debt mutual funds invest in very short-term and high-quality financial instruments. They are designed for investors who want to park surplus money for a short period, usually a few weeks to a few months, while aiming for better risk-adjusted returns. They focus on capital preservation, liquidity, and stable returns rather than high growth," says Amit Modani, senior fund manager - lead, fixed income, Shriram Asset Management Company.
As of January 31, 2026, the MMF category was the second-largest among debt funds, with assets under management (AUM) of Rs 3.32 trillion, next only to liquid funds at Rs 5.37 trillion, according to Association of Mutual Funds in India (Amfi) data.
Reasonable returns
MMFs can offer reasonable accrual income without taking much interest-rate risk.
"MMFs typically invest in commercial papers (CPs), certificates of deposit (CDs), and treasury bills (T-bills). They have a weighted average maturity of 3-9 months. They offer high-quality portfolios with diversification," says Dhawal Dalal, president and chief investment officer-fixed income, Edelweiss Mutual Fund.
"Currently, MMFs with a weighted average maturity of 6-9 months can yield around 7.2-7.5 per cent per annum, compared to the repo rate, which stands at 5.25 per cent. That means clients are earning around 200 basis points more than overnight funds. This is attractive for clients with an investment horizon of at least 3 months," explains Dalal.
"A relatively high spread over the repo rate makes the accrual level of MMFs that much better," says Joydeep Sen, corporate trainer (debt) and author.
Low interest rate sensitivity
MMFs carry lower interest rate sensitivity than longer-duration debt funds as their portfolios are concentrated in short-maturity instruments.
"Their interest rate risk is low, making them suitable for conservative investors, corporates managing idle cash, or individuals building an emergency or short-term parking portfolio," says Modani.
"Given the relatively flat term premium between 1-year CDs and 2-3-year AAA CPSE bonds at the moment, we believe MMFs offer a good combination of 7 per cent plus yield, liquidity and diversification with relatively lower interest-rate risk as compared to other fixed income funds with maturity of more than two years," says Dalal.
Risks to account for
MMFs are not entirely without risks.
"They are market-linked products and do not offer guaranteed returns. They also carry interest-rate risk, liquidity risk, and credit risk. Also, reinvestment risk occurs when instruments mature, and fund managers may have to reinvest at lower interest rates, potentially reducing future returns," says Modani.
"While default risk exists, usually fund houses run good credit quality portfolios. However, when the debt market is rallying, other debt funds can give better returns than MMFs," says Sen.
For conservative investors
MMFs suit conservative investors.
"They are suitable for investors who prioritise liquidity, capital preservation, and short-term risk-adjusted returns. They may be ideal for conservative investors with a low to moderate risk appetite, short-term investors with surplus funds for brief periods, and HNIs looking to temporarily deploy large sums," says Modani.
Investors with a 6 to 12 month horizon may consider them. They should align their holding period with the fund's maturity profile and prefer schemes with a lower expense ratio.
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Feature Presentation: Aslam Hunani/Rediff
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