Money Market Fund

How it works

A money market fund is a debt mutual fund that, by SEBI definition, invests in money-market instruments with maturities up to one year — Treasury bills, commercial paper (short-term corporate borrowing), certificates of deposit (short-term bank borrowing) and similar high-quality short paper. The short maturities keep interest-rate risk low, so the NAV stays relatively steady and predictable.

It sits between ultra-short and short-duration funds on the risk-return ladder — offering slightly more return potential than a plain liquid fund, in exchange for modestly more day-to-day variability.

In India

Money market funds suit investors parking money for a few months up to about a year — surplus cash, a near-term goal, or money waiting to be deployed into equities. They typically aim to beat savings-account and short-term FD returns for these horizons, while keeping volatility minimal and liquidity high.

Under current tax rules (for investments made after April 2023), gains are added to your income and taxed at your slab rate, just like other debt funds, with no indexation benefit available. This makes the post-tax comparison against alternatives important.

Why it matters

For genuinely short-term money, money market funds offer both better liquidity and often better post-cost returns than a savings account, without locking your money away like a fixed deposit does. They are a practical, flexible home for funds you know you'll need within a year but not in the next few days.

Common mistakes

Don't expect equity-like returns — these funds deliberately prioritise safety and liquidity over yield. Don't ignore the small credit risk lurking in commercial paper and certificates of deposit; choose funds that hold consistently high-quality, well-rated portfolios. And for money you might need within days rather than months, a liquid or overnight fund is the better fit. Always match the fund's horizon to your own.