Money Market Mutual Funds & Exchange Traded Funds

CA Raj Kumar - Avatar Image Written by CA Raj Kumar - Updated on March 5, 2017. Estimated Reading Time: 2 minutes.
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Money Market Mutual Funds & Exchange Traded Funds

In 1992, GOI thought to introduce Money Market Mutual Funds (MMMFs) on Indian Financial Canvass. The aim of the Government was to develop the money market and to enable individual investors to gain from money market instruments since it is practically impossible for individuals to invest in instruments like Commercial Papers (CPs), Certificate of deposits (CDs) and Treasury Bills (TBs) which require huge investments.

The broad framework of guidelines in respect of MMMFs issued by RBI are as follows:

  • The investment by individuals and other bodies would be in the form of negotiable and transferable instruments and MMMF deposit accounts.
  • The minimum investments would be ₹1 lakh.
  • The re-purchase would be subject to a minimum lock-in-period of 3 months.
  • The funds will not be subject to reserve requirements as these will be invested in money market instruments.
  • Minimum of 20 percent of funds will be invested in 182days treasury bills.
  • Maximum of 20 percent of funds will be diverted to call money markets.

These funds are generally considered the safest and most secure form of mutual fund investments. Its goal is to preserve the principal while yielding a modest return. It is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.

Exchange Traded Funds

Exchange Traded Funds are a type of financial instrument whose unique advantages over mutual funds have caught the eye of many of investors. It is a hybrid product that combines the features of an index fund. These funds are listed on the stock exchanges and their prices are linked to the underlying index. The authorised participants act as market makers for ETFs. ETFs can be bought and sold like any other stock on an exchange. It can be bought or sold at any time during the market hours at prices that are expected to be closer to the NAV at the end of the day. Therefore, one can invest at real time prices as against the end of the day prices as is the case with open-ended schemes.

A significant advantage is that there involves no paper work in investing in an ETF. These can be bought like any other stock by just placing an order with a broker.

An exchange-traded fund trades like a stock. Just like an index fund, an exchange traded funds represents a basket of stock that reflect an index such as the Nifty, BSE, S&P 500 in global market. An exchange traded funds, however, isn’t a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an exchange traded funds’ price changes throughout the day, fluctuating with supply and demand. It is important to remember that while exchange traded funds attempt to replicate the return on indexes, there is no guarantee that they will do so exactly. It is not uncommon to see a 1% or more difference between the actual index’s year-end return and that of an exchange traded funds.

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CA Raj Kumar

I love blogging and studying taxation. I write articles related to Tax laws and common issues in handling taxation in India. Often, common but small mistakes make things complicated. I write and share them to save precious time of others.

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