Money market fund is also called as liquid fund. They invest in money market instruments such as treasury bills, commercial paper and certificates of deposit with a maturity term under 91 days. They also invest in short term debt which matures in a time period under a year.
Returns from the Money Market Fund
Money market funds give good returns, in times of high inflation. When RBI raises or keeps them high, money market funds give good returns.
Why invest in Money Market Funds?
These funds are extremely liquid. You can buy and sell them within a day. You are not charged an entry or an exit fee.
A Good Saying
You can keep your extra cash in a money market fund and earn higher interest than a savings bank account.
Safer than most debt funds. They invest in fixed income securities with very short maturity. Low on risk.
Dividends are tax free in your hands. The profit you make in the long term is taxed with an indexation benefit.
Types of Money Market Funds
Money market funds come with different plans. You have the growth plans, daily dividend plans, weekly and monthly dividend plans. Growth plans do not give you any dividends. You can also invest in direct plans which have a lower expense ratio as there are no intermediary charges.
Taxation of Money Market Funds
Short term capital gains (gains under 3 years), are added to your taxable salary. Taxed as per income tax slab you fall under. Long term capital gains (gains over 3 years), are taxed at 20% with indexation.