Money Market Fund
A money market fund is an open-ended debt mutual fund that invests exclusively in money market instruments with a maximum maturity of up to one year, including treasury bills, commercial paper, certificates of deposit, and collateralised borrowing and lending obligations (CBLOs).
SEBI's 2017 mutual fund categorisation mandated that money market funds invest only in money market instruments with maturities up to 1 year. This distinguishes them from liquid funds (which are capped at 91-day maturity for individual instruments) and ultra short duration funds (which have a portfolio Macaulay duration of 3–6 months). The broader maturity envelope of money market funds — up to 12 months per instrument — means they can typically offer slightly higher yields than liquid funds while maintaining high credit quality and relatively low sensitivity to interest rate movements.
The instruments in a money market fund's portfolio include RBI Treasury Bills (91-day, 182-day, and 364-day T-bills), certificates of deposit (CDs) issued by banks with tenors up to one year, commercial paper (CP) from highly rated corporates and NBFCs, and CBLO/tri-party repo transactions for overnight liquidity management. The fund's net asset value (NAV) typically follows a smooth upward trajectory, punctuated by minor volatility from mark-to-market adjustments as rates fluctuate.
In India, money market funds have consistently attracted corporate treasuries, high-net-worth individuals (HNIs), and family offices as efficient vehicles for parking short-term surpluses — typically in the range of a few months to one year. The yields offered by money market funds are broadly aligned with short-term money market rates, which in turn are influenced by the RBI's policy repo rate, the overnight index swap (OIS) curve, and systemic liquidity conditions.
The credit risk in money market funds is generally low because most holdings are sovereign or short-tenor instruments from highly rated banks and corporates. SEBI also mandates that at least 25% of the portfolio be held in liquid assets (overnight or call money market instruments) to manage redemption pressures. During periods of tight liquidity — such as advance tax outflow dates or GST payment dates — money market rates can spike, temporarily boosting returns.
From a risk perspective, money market funds are far more stable than longer-duration debt categories, but they are not entirely without risk. Credit events in the commercial paper or CD space can cause sudden mark-to-market losses, as witnessed with certain NBFC issuers during 2018–19. Post Finance Act 2023, gains are taxed at the investor's applicable income tax slab rate.