Money market funds invest in money market instruments like commercial papers, certificates of deposits, treasury bills etc having maturities of up to 1 year. Money market instruments are highly liquid instruments and have low interest rate risk owing to their short maturity profiles. The risk profiles of these funds are likely to be similar to low duration funds. In the short term these funds can be slightly more volatile than liquid and ultra-short term funds, but over an investment tenor of 1 year or so, these funds can give higher returns than liquid and ultra-short term funds. When investing in money market funds, you should look up the average maturity of the fund portfolio in the fund factsheet. You should try to align your investment tenor to the average maturity of the fund. Investors should also check the credit quality of the fund’s underlying portfolio before investing.
