Making suitable investments is important. They assist in meeting various goals, achieving a better lifestyle, and securing your financial future. Hence, you should actively invest. Furthermore, choosing the right investment option is more important. Today, there are innumerable investment options. Opt for an option that fits your investment profile the best.
If you are a risk-averse investor wanting to earn decent returns, Money Market Funds are an excellent investment option to explore. Money Market Funds are Mutual Fund that predominantly invests in various Money Market Instruments. They are simple and profitable. The following are the most crucial aspects of Money Market Funds:
How do they work?
As mentioned, Money Market Funds invest in Money Market instruments. They are also popularly called Debt instruments. The government or a related authority typically issues them. It is a Loan the government or the instrument issuing authority avails of from you. Given this, Debt instruments work on the interest rate concept, earning you regular, reasonable returns. Like other Loans, credit rating plays an essential role in such investment transactions.
Check for the Debt instruments issuer’s credit rating before opting for it. The higher the credit rating, the better. A higher credit rating assures the issuer to repay your Loan amount and fulfil the interest payments.
Things to consider
Make the following considerations before considering a Money Market investment:
Returns and risk
Money Market Funds earn you decent returns. Generally, they are known to offer better returns than Bank Deposits. However, they cannot earn you extraordinary returns like Equities. You should consider this when investing in them to achieve a financial goal. Overall, Money Market Funds are considered a safer bet than Equities but are not entirely risk-free. They involve credit risk, which you should be mindful of.
Expense ratio
It is the cost incurred by you to make the investment. It adds up to your total investment cost. A lower expense ratio works in your favour, allowing you to enjoy your investment returns to the fullest. The Money Market Mutual Fund is typically associated with a low expense ratio, as you need not monitor the market constantly. Hence, it is a good investment option. But still, explore the market and scout for the lowest expense ratio.
Taxation
Mutual Fund returns are taxable. They draw Capital Gains taxes. There are two Capital Gain taxes: Long-Term and Short-Term. The applicable tax depends on your holding period. Short-Term Capital Gain Tax applies to you if your Money Market Fund holding period is less than three years. If your holding period is over three years, Long-Term Capital Gain Tax applies. Be considerate of applicable taxation before you invest in Money Market.
