Money Market Debt Fund

A Money Market Debt Fund is a type of debt mutual fund. It mainly invests in high-quality, short-term money market instruments. These include treasury bills, certificates of deposit, commercial papers, and repurchase agreements (repos). Such funds are designed to provide high liquidity and low risk, which is ideal for parking funds for very short durations, typically up to one year.

Capital preservation with a small profit is the main objective of a Money Market Fund. It is considered less sensitive to interest rate changes than other debt instruments, particularly when investing in one-year maturities or less. This makes it a suitable choice for investors who are cautious and need to manage their short-term cash needs.

Money Market Funds are also actively managed to maintain a liquid and high-quality portfolio. Fund managers work actively in the market, regularly monitoring the credit ratings of issuers and prevailing interest rates. Their goal is to find the best return while reducing risk. Returns here aren't fixed or guaranteed, but they often exceed those of savings accounts and usually match or slightly outperform liquid funds.

Money Market Funds are ideal for individuals who need to keep their cash safe for a short period, such as when they're between two significant investments. They also work well in Systematic Transfer Plans (STPs), gradually shifting money from a safe asset to a riskier one, such as equity, over time.

Taxation: Debt fund rules apply to Money Market Funds. Income from short-term gains (held for less than three years) is added to the investor’s taxable income. For long-term gains (held over three years), investors benefit from indexation, which reduces the tax liability.