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Money Market Mutual Money Market Mutual Funds Funds
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Money Market Mutual Money Market Mutual FundsFunds
To understand money market mutual funds first we need to understand debt instruments.
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What Is A Debt What Is A Debt Instrument?Instrument?
A debt instrument represents contract where one party (the party which buy the debt instrument-investor) is lender and the other party (the party which issues the debt instrument-issuer) is borrower.
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Debt InstrumentDebt Instrument
Every debt instrument has following three fundamental features associated with it.
◦Principal:
◦Maturity:
◦Coupon:
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PrincipalPrincipal
Principal or face value of the debenture (Also called par) represents the amount of debt the investor has given to the issuer.
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MaturityMaturity
Maturity date is the date on which issuer of the debt instrument repay the principal amount (also called face value) of the debt instrument to the investor.
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CouponCoupon Coupon rate refers to the rate of
interest calculated with reference to face value (or principal amount).In other words it is the interest rate which issuer promises to pay the investor.
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Debt InstrumentDebt Instrument
On the basis of maturity period there are two broad categories of the debt instrument
Short term debt instrument
Long term debt instrument
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Short Term Debt Short Term Debt InstrumentInstrument It is a debt instrument whose maturity is less than one year from the date of issuance.
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Long Term Debt Long Term Debt InstrumentInstrumentIt is a debt instrument whose maturity more than one year from the date of issuance
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Issuers Of Debt Issuers Of Debt InstrumentsInstruments In India debt instruments are issued
by following categories of organizations
◦ Government
Includes Central Government, State Government, Municipal Corp. etc.
◦ Government related organizations
Includes organizations like RBI, PSUs etc.
◦ Corporates
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BondBond
When government or government related organizations is the issuer of a long term debt instrument, the instrument is called bond
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DebentureDebenture
When a private or public limited company is issuer of a long term debt instrument the instrument is called debenture
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What Is A Money Market What Is A Money Market Instrument?Instrument? A money market instrument is a short term debt instrument. It includes
Commercial papers
Commercial bills
Treasury bills
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Money Market Money Market InstrumentInstrumentGovernment securities having an
unexpired maturity up to one year
Call or notice money
Certificate of deposit
Any other like instruments as specified by the Reserve Bank of India from time to time
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Money Market Mutual Money Market Mutual FundFundObjective: Investing exclusively
in money market instruments.
Features
◦Liquid
◦Moderate income
◦Comparatively less risky
◦Proper for short term investment
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Returns Of A Money Returns Of A Money Market Mutual FundMarket Mutual Fund Generally a money market mutual
fund provides return
Higher than saving bank account but
Lower than bank fixed deposits.
However there is no guarantee as to actual rate of return.
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Are These Funds Risky?Are These Funds Risky?
Among all categories of mutual fund, money market mutual funds are considered least risky due to very nature of the debt instruments in which money market schemes invest.
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Risks InvolvedRisks Involved
There are two major risks associated with investment in debt instruments
Risk of default
Risk of interest rate:
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Risk Of DefaultRisk Of Default
Risk of default refers to the risk of failure of issuer of a debt instrument to make interest payment or repayment of principal.
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Risk Of Interest RateRisk Of Interest Rate
Risk of interest rate refers to the possibility of change in the market value of a debt instrument due to change in general interest rate level.
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Evaluate Risk Of Evaluate Risk Of Default Default Risk of default associated with a
money market scheme can be evaluated by looking the rating of papers the money market scheme has invested in.
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Credit Rating AgenciesCredit Rating AgenciesCRISIL
ICRA
CARE
FITCH
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Long Term Debt Long Term Debt InstrumentsInstruments
Credit Rating Agency
Degree of Safety CRISIL ICRA
Highest safety AAA AAA
High safety AA AA
Adequate Safety A A
Moderate Safety BBB BBB
Inadequate Safety BB BB
High Risk B B
Substantial Risk C C
In default D D
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Short Term Debt Short Term Debt InstrumentsInstruments
Credit Rating Agency
Degree of Safety CRISIL ICRA
Highest P-1 A1
P-2 A2
Medium P-3 A3
P-4 A4
Lowest P-5 A5
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Evaluate Risk Of Interest Evaluate Risk Of Interest Rate Rate
Average maturity of the portfolio
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Taxation AspectTaxation Aspect
An investor of the money market mutual fund has two options while investing in a money market scheme
Growth
Dividend
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Taxation AspectTaxation Aspect Growth Option
No TDS is deducted
Entire capital appreciation is given
Investor is required to pay applicable short term or long term capital gains tax as per tax slab
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Taxation AspectTaxation AspectApplicable capital gain tax
Investor’s IT Slab Nil 10% 20% 30%
Short Term Capital Gain Tax Nil 10% 20% 30%
Long Term Capital Gain Tax
With Indexation Nil 20% 20% 20%
Without Indexation Nil 10% 10% 10%
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Taxation AspectTaxation Aspect
Dividend Option
Dividend paid is tax free
Dividend is paid after deducting applicable Dividend Distribution Tax
Current rate of DDT is 25%
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Bank FD Vs. MM Scheme Bank FD Vs. MM Scheme ComparisonComparison
Bank FD Liquid Plus
Schemes
Money Market
Schemes
If Returns 9% 8% 8%
Tax 30.90% 14.16% 28.32%
Post Tax Returns
6.22% 7.00% 6.23%
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