Lower risk appetite? Park your savings in money market funds

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If you are looking for better alternative to savings and fixed deposits for a short-term, money market funds could be a good option for you. Investors with a short time horizon of up to one year can consider investing in these funds. These funds invest in diverse short-term financial securities and generate offer higher returns than FDs or savings account.

What are money market funds?

Money market funds area type of mutual funds, which are most suitable for short-term investors. Being a debt category fund, they are a good for risk averse investors. There is a lesser chance of fluctuations of the Net Asset Value (NAV) of the fund.

Money Markets Funds can be:

Certificate of Deposit (CD) – Scheduled commercial banks offer time deposits that are fixed deposits that have tenure and can be redeemed only at maturity. These might be deposits held by companies and institutions.

Treasury Bills (T-bills) – These are financial securities that are issued by the Government of India. These bills are used to raise money for a tenure of up to a year. They come with a sovereign guarantee, hence are one of the safest investments. The interest rate offered for T-bills is known as the risk-free rate of return. When compared to all other investments, the interest rate is low on T-bills.

Commercial Paper (CPs) – Also known as promissory notes, they are issued by companies and financial institutions that have a high credit rating.  These investments are issued at a discount and are redeemed at face value.

Repurchase Agreements (Repos) – You can invest in agreements, in which the Reserve Bank of India (RBI) lends money to commercial banks.