Money market mutual funds are a type of debt fund that invests in short-term money market instruments. These are financial instruments that are generally used for borrowing and lending money for shorter periods.

As per SEBI's rules, a money market fund must invest in instruments with a maturity of up to 1 year. As a result, these funds are not preferred for long-term investing.

Money market funds usually have lower interest rate sensitivity than longer-duration debt funds. However, they are not risk-free. The fund's NAV can change due to interest rates, credit quality, liquidity and securities held in the portfolio.

Remember that “money market” does not mean the fund invests in the stock market. These funds deal in short-term debt and money market instruments.

These funds may suit you if:

• Your investment horizon is up to one year: Money market schemes are suitable for short-term financial goals as underlying instruments mature within a year. If you may need the money almost immediately, you can consider overnight funds.
• You want to park some money outside a savings account: You may have money sitting in your bank account that you don't expect to use for some time. This scheme gives you another place to put it, although the returns are not guaranteed.
• You don't want to take equity-level risk: If the ups and downs of equity funds feel like too much for a short-term goal, money market mutual funds can offer a lower-risk profile.
• You are comfortable with little price movement: Since these funds are market-linked, their NAV may fluctuate. If you prefer a 6-12 month portfolio duration, you can also compare them with low duration funds.

When you invest in a money market fund, your money is added to a pool along with investments from other investors. The fund manager uses this pool to buy eligible money market instruments.

These securities then earn interest or generate returns through price movements. The value of your mutual fund units is reflected in the NAV, which can change based on these earnings and price movements.

Let's understand this with a scenario. Suppose you invest ₹5,000 in a money market fund when its NAV is ₹25. You would receive 200 units (₹5,000/₹25).

Now imagine the NAV moves to ₹25.50. Your 200 units would then be worth ₹5,100 (200 units x ₹25.50). So, your investment has increased by ₹200 in this scenario.

But the NAV can also fall. If it moved to ₹24.75, your 200 units would be worth ₹4,950 (200 units x ₹24.75).

The important point to understand is that these investments do not promise a fixed return. They can show a temporary loss if the NAV drops below your cost. There are many factors that affect the NAV, such as interest rate events or market conditions.

• Lower duration risk: As the instruments are short-term, these funds generally have less exposure to interest-rate movements than funds holding longer-duration securities, such as corporate bond funds or credit risk funds.
• Different types of instruments in one fund: The fund's portfolio can include instruments such as T-Bills, CDs and commercial paper. This means you don't have to choose and manage each instrument yourself.
• Access to short-term debt markets: Some money market instruments may not be practical for individual investors to buy directly. A mutual fund can give you exposure to a portfolio of such instruments.
• Useful for managing extra cash: If you have money that you don't need immediately, a money market scheme can be one option to consider. Your choice should still depend on how soon you need the money and how much risk you can take.

• Credit-related risks: Some instruments are issued by companies and financial institutions. If the issuer has trouble repaying its debt, the fund can be affected.
• Returns are not guaranteed: The name ‘money market’ does not mean your returns are fixed. Unlike a fixed deposit, a mutual fund does not promise a particular interest rate.
• Fund's reinvestment uncertainty: Short-term instruments mature regularly. When the fund reinvests the money, the available interest rates may be lower than before.
• Liquidity risks: A security may not always be easy to sell at the expected price. This can happen especially when market conditions are difficult. This can affect the fund's NAV.

Don't just choose money market funds to invest in only because it looks like a low-risk option to park money. The fund's portfolio and credit quality still matter.

These 3 categories of debt funds are easy to confuse because they all invest in short-term debt instruments. Let's compare them to understand the differences:

Finding the best money market mutual funds is not about picking whichever funds show the highest recent return. You should consider other factors too, such as:

• Check what the fund owns: Look at the types of instruments in the portfolio. A fund holding T-Bills has a different issuer profile from one with more exposure to corporate instruments.
• Look at credit quality: Check the ratings and issuers behind the securities. Higher-rated securities generally indicate better credit quality.
• Check portfolio maturity and liquidity: See how the fund is positioned within the allowed 1-year maturity range. A well-managed portfolio should also have enough liquidity to handle investor redemptions.
• Compare performance over time: Don't judge a debt fund from one good year. Look at how it has performed across different interest-rate and market conditions.
• Look at the expense ratio: Costs reduce your net return. When comparing similar schemes, it's worth checking the expense ratio.

The best money market funds for you should fit your time horizon and risk comfort.

You can set up your money market fund SIP on the Millions app within a few minutes. Here's how:

• Download the Millions app from the iOS App Store or Google Play Store.
• Enter your details and complete KYC to create your free account.
• Once you're logged in, search the curated mutual funds and select a money market fund that fits your goal.
• Tap ‘SIP’ and choose your preferred frequency (daily, weekly or monthly).
• Enter your investment amount, select the SIP date and complete the payment.

And it's done! A money market fund can be useful when you want your short-term money to remain invested rather than simply sitting unused. You can explore options such as liquid funds, low duration funds or short duration funds if your investment horizon changes.