Top 5 money market funds based on 1-year returns: Union Money Market Fund leads with over 6% return

Investors looking to park surplus money for the short term, typically up to one year, may consider money market funds. These debt schemes invest in money market instruments with maturities of up to one year.

Based on one-year CAGR performance, Union Money Market Fund has emerged as the best-performing scheme in the category, followed by LIC MF Money Market Fund and Bank of India Money Market Fund.

What are top 5 money market funds by 1-year return?

Union Money Market Fund delivered the highest one-year return of 6.63%, making it the best money market fund among its peers. Over a three-year period, it generated an annualised return of 7.24%

LIC MF Money Market Fund secured the second spot with a one-year return of 6.56%. The fund has delivered an annualised return of 6.82% over the last three years.

Bank of India Money Market Fund ranked third, posting a one-year return of 6.54%.

What are money market funds?

Money market funds are a category of debt mutual funds that invest primarily in money market instruments with maturities of up to one year, in line with Securities and Exchange Board of India (SEBI) regulations.

Their portfolios typically include treasury bills (T-Bills), certificates of deposit (CDs), commercial papers (CPs), repo transactions and other short-term debt securities. Since these instruments mature within a year, they generally experience lower price fluctuations than longer-duration debt securities.

The short maturity profile helps keep volatility relatively low while ensuring that investors can access their money with ease. Compared with liquid funds, money market funds may be slightly more sensitive to changes in interest rates, but they carry significantly lower interest rate risk than medium-or long-duration debt funds.

Who can consider investing in these funds?

Money market funds are suitable for investors who have surplus money they may need within the next few months to about one year. They can also be useful when the exact timing of a future expense is uncertain.

For example, an investor planning to make a down payment on a house within eight to 10 months, or someone waiting for the right opportunity to invest in equities, may invest in a money market fund to temporarily park funds rather than leave the money idle in a savings account.

These schemes are primarily intended to preserve liquidity and earn modest returns. Their performance is largely influenced by short-term interest rates and the RBI's monetary policy.

What are risks investors should know about?

These funds are not completely risk-free, as they generally fall under the low-risk to moderate-risk category.

Credit risk remains, though it is generally limited because the schemes invest in high-quality and short-term instruments. There is also interest rate risk, as changes in market yields can affect the value of underlying securities, even if the impact is typically smaller than in longer-duration debt funds.

In periods of extreme market stress, liquidity conditions may also tighten temporarily, potentially affecting redemption timelines.

Therefore, money market funds may not be suitable for investors seeking guaranteed returns or those investing with a long-term wealth-creation objective.

Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.