Money Market Mutual Funds (MMMFs): Meaning, Features, Objectives & Working

 Investing Surplus Cash in Marketable Securities

Surplus cash refers to funds held in excess of a firm’s immediate operational requirements. Such cash is retained primarily for the following reasons:

1. Fluctuating Working Capital Needs The working capital requirements of a firm are not constant and may vary due to seasonal demand, changes in production levels, or credit cycles.
2. Precautionary Motive Excess cash is maintained as a buffer to meet unforeseen or unpredictable financial obligations.

To ensure optimal utilization, surplus cash is often invested in marketable securities. These securities are preferred because they can be quickly converted into cash with minimal risk and loss of value.

Marketable securities typically possess the following three essential features:

1. Safety – Preservation of principal with minimal risk of default.
2. Maturity – Short-term duration to ensure liquidity when funds are needed.
3. Marketability – Ease of conversion into cash without significant price fluctuation.

Types of short-term investment opportunities

1. Treasury Bills (T-Bills)
2. Commercial Papers (CP)
3. Certificate of Deposit (CD)
4. Bank Deposits
5. Inter-Corporate Deposits (ICDs)
6. Money Market Mutual Funds (MMMFs)

Treasury Bills (T-Bills)

The market in which Treasury Bills are purchased and sold is known as the Treasury Bill Market. A Treasury Bill is a type of finance bill in the nature of a promissory note issued by the Government at a discount for a fixed period not exceeding one year, carrying a promise to pay the stated amount to the bearer on maturity.

Treasury Bills are short-term debt instruments issued by the Government of India. They are zero-coupon securities, meaning they do not carry any interest. Instead, they are issued at a discount and redeemed at face (par) value on maturity.

Normally, Treasury Bills are issued in three standard tenors:

• 91-day Treasury Bills
• 182-day Treasury Bills
• 364-day Treasury Bills

Treasury Bills can be bought and sold at any time, making them highly liquid instruments. Since they are backed by the Central Government, they carry no default risk.

Definition of Treasury Bills

1. A Treasury Bill is a promissory note issued by the Government under discount for a specified period stated therein.
2. Treasury Bills are money market instruments used to finance the short-term financial requirements of the Government of India.

Features of Treasury Bills

1. Issuer Treasury Bills are issued by the Government to raise funds from the public and financial institutions.
2. Purpose They are issued to bridge the temporary gap between government receipts and expenditures.
3. Finance Bills Treasury Bills do not arise from credit sales of goods like trade bills; hence, no commercial transaction is involved.
4. Liquidity Treasury Bills are highly liquid and can be easily converted into cash.
5. Short-Term Nature They are issued for a period of less than one year.
6. Monetary Management The Reserve Bank of India (RBI) uses Treasury Bills as a tool for short-term monetary management to regulate liquidity in the economy.

Advantages of Treasury Bills

1. High Liquidity – The RBI readily rediscounts Treasury Bills.
2. No Default Risk – Guaranteed by the Central Government.
3. Continuous Availability – Issued on a tap basis.
4. Low Transaction Cost – Involves minimal transaction expenses.
5. Safe Returns – Assured repayment at maturity.
6. No Capital Depreciation – Redeemed at par value.
7. Eligible for SLR – Can be used to meet Statutory Liquidity Ratio requirements.
8. Short-Term Fund Mobilisation Tool – Helps the government raise funds for short durations.
9. Monetary Control Instrument – Used by the RBI for liquidity management.
10. Refinancing Facility – Can be refinanced through the RBI.

Commercial Papers (CP)

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. As part of efforts to develop the Indian money market, Commercial Paper was introduced in India in 1990 to enable highly rated corporate borrowers to diversify their sources of short-term finance and to provide investors with an additional short-term investment avenue.

Commercial Paper is a short-term debt instrument used by large corporate entities to raise funds from the money market. These instruments are marketable securities, ensuring adequate liquidity.

Maturity and Issue Characteristics

1. CPs are issued for maturities ranging from 15 days to one year, though maturities generally do not exceed 270 days.
2. They are issued at a discount to face value, with the discount reflecting prevailing market interest rates.
3. CPs may be issued in physical form (promissory note) or in dematerialised form through SEBI-approved depositories.
4. The minimum denomination is ₹5 lakh or multiples thereof.
5. The minimum investment by a single investor is ₹5 lakh (face value).

Eligible Investors

Commercial Papers may be issued to and held by:

1. Individuals
2. Banking companies
3. Corporate bodies registered or incorporated in India
4. Unincorporated bodies
5. Non-Resident Indians (NRIs)
6. Foreign Institutional Investors (FIIs), subject to limits prescribed by SEBI

RBI Guidelines for Issue of Commercial Paper

The issuance of Commercial Paper by companies, primary dealers, and satellite dealers is governed by the Reserve Bank of India (RBI) under Sections 45J, 45K, and 45L of the RBI Act, 1934. As per RBI guidelines, the issuing company must satisfy the following conditions:

1. Minimum Tangible Net Worth The company should have a tangible net worth of not less than ₹4 crore as per the latest audited balance sheet.
2. Working Capital Limit The company must have a sanctioned working capital limit from a bank or an All-India Financial Institution.
3. Standard Asset Classification The borrower’s account should be classified as a standard asset by the financing bank or institution.

Issue Procedure

1. The total amount of CP proposed must be raised within a period of two weeks from the date of opening the issue.
2. CPs may be issued on a single date or in tranches, provided all tranches have the same maturity date.
3. Every CP issue must be reported to the Chief General Manager, Industrial and Export Credit Department (IECD), RBI, Central Office, Mumbai, through the Issuing and Paying Agent (IPA) within three days of completion of the issue.

Advantages of Commercial Paper

1. Low-Cost Financing CPs are generally issued at interest rates lower than bank prime lending rates.
2. No Collateral Requirement Being unsecured instruments, CPs do not require security.
3. No Compensating Balance Issuers are not required to maintain compensating balances, although approved bank credit lines must be maintained.
4. Quick Fund Mobilisation Large volumes of funds can be raised efficiently and quickly.
5. Cost-Effective CPs do not require registration with the Securities and Exchange Commission (SEC) if maturity is below 270 days, reducing issuance costs.
6. Prestige Issuance of CP enhances the issuer’s reputation in the financial market.

Certificate of Deposit (CD)

Certificates of Deposit were introduced in India in July 1989. A Certificate of Deposit (CD) is a negotiable money market instrument issued in dematerialised form or as a usance promissory note against funds deposited with a bank or other eligible financial institution for a specified period.

CDs represent a time deposit and are interest-bearing, maturity-dated obligations of the issuing bank or financial institution. The issuance of CDs in India is governed by guidelines issued by the Reserve Bank of India (RBI), as amended from time to time.

In simple terms, a Certificate of Deposit is a money market instrument issued in dematerialised form against a fixed deposit placed with a bank for a specified maturity period.

Definition of Certificate of Deposit

A Certificate of Deposit is a document of title similar to a time deposit with a bank. It is a negotiable, interest-bearing instrument with a specified maturity date.

Subscribers to Certificates of Deposit

Certificates of Deposit may be issued to:

1. Individuals
2. Corporations and companies
3. Trusts, funds, and associations

Non-Resident Indians (NRIs) may also subscribe to CDs, but only on a non-repatriable basis, which must be clearly mentioned on the certificate. Such CDs cannot be endorsed or transferred to another NRI in the secondary market.

Aggregate Amount of Issue

1. Banks are free to issue CDs depending on their funding requirements.
2. Financial Institutions (FIs) may issue CDs within the overall umbrella limit fixed by the RBI.
3. The total amount of CDs issued, together with other instruments such as term money, term deposits, commercial papers, and inter-corporate deposits, should not exceed 100% of the institution’s owned funds as per the latest audited balance sheet.

Minimum Size of Issue and Denomination

1. The minimum amount of a Certificate of Deposit is ₹1 lakh.
2. Deposits must be made in multiples of ₹1 lakh thereafter.
3. The minimum deposit that can be accepted from a single subscriber is ₹1 lakh.

Bank Deposits

A deposit account is a bank account that allows money to be deposited and withdrawn by the account holder. Deposit accounts include savings, current, recurring, and fixed deposit accounts. Deposits constitute the major source of funds for banks.

Firms and individuals may place their temporary surplus cash with banks for varying periods. The rate of interest earned depends largely on the type of deposit and its maturity period.

Types of Bank Deposit Accounts

1. Current Deposit Account

• Mainly introduced for business purposes
• No restriction on the number or amount of withdrawals
• No interest is paid on current accounts
• Facilities such as overdrafts, loans, and advances are provided
• Suitable for firms requiring frequent transactions

2. Fixed Deposit Account

• Money is deposited for a fixed period
• Principal amount is payable at maturity
• Offers a higher rate of interest compared to savings accounts
• Interest may be payable quarterly, annually, or at maturity, as per the depositor’s choice
• Ideal for investing surplus funds for a specified duration

3. Recurring Deposit Account

• A fixed amount is deposited every month
• Interest rate is similar to that of fixed deposits
• Monthly instalments must be deposited before the last working day of the month
• Generally has a longer maturity period
• In case of premature closure, the bank may pay no or reduced interest

Inter-Corporate Deposits (ICDs)

The Inter-Corporate Deposit (ICD) market deals with unsecured short-term loans provided by one corporate entity to another. These deposits are made between corporations or financial institutions registered under the Companies Act, 1956.

Inter-Corporate Deposits are arrangements in which a company with surplus funds lends money to another company facing a temporary shortage of funds. Since these loans are unsecured and largely unregulated, lenders generally charge higher interest rates. The short-term creditworthiness of the borrowing company significantly influences the interest rate.

The maturity of ICDs can range from one day to one year, though the most common maturity period is around 90 days. In practice, many ICDs are made for three to six months.

Nature of Inter-Corporate Deposits

1. ICDs are used by corporates with surplus cash to finance cash-starved companies.
2. They carry higher risk compared to bank deposits.
3. The cost of funds is generally higher for corporates than for banks due to the absence of collateral and regulation.

Characteristics of Inter-Corporate Deposits

1. ICDs are a popular source of short-term finance for corporates
2. Generally issued for short durations, such as three or six months
3. Based on company-to-company borrowing relationships
4. Simple and quick procurement procedure
5. Interest rates are negotiable and depend on the amount invested and market conditions
6. Considered risky, as funds may be withdrawn at short notice
7. Not governed by any specific legislation

Types of Inter-Corporate Deposits

1. Call Deposit
• The lender can withdraw the funds by giving one day’s notice. 
• In practice, withdrawal usually occurs after three days
2. Three-Month Deposit
• Funds are lent for a period of three months
• Used to meet short-term liquidity requirements
3. Six-Month Deposit
• Funds are lent for a period of six months
• Commonly used for slightly longer short-term financing needs

Money Market Mutual Funds (MMMFs)

Money Market Mutual Funds (MMMFs) invest in short-term marketable securities such as Treasury Bills (T-Bills), Commercial Papers (CPs), Certificates of Deposit (CDs), and Call Money. These funds generally have a minimum lock-in period of 30 days, after which investors can withdraw their funds at short notice.

In India, MMMFs are offered by institutions such as UTI, IDBI, and other mutual fund houses.

Meaning and Nature of MMMFs

MMMFs are used to manage short-term cash requirements. They are open-ended debt mutual funds that invest exclusively in cash and cash-equivalent instruments. Since money market instruments typically have an average maturity of up to one year, they are classified under the money market.

The fund manager invests in high-quality, highly liquid instruments including:

• Treasury Bills
• Repurchase Agreements (Repos)
• Commercial Papers
• Certificates of Deposit

The primary objective of MMMFs is to earn regular interest income for unit holders while minimising fluctuations in Net Asset Value (NAV).

Objectives of Money Market Mutual Funds

• Preservation of capital
• Liquidity and easy access to funds
• Stable NAV
• Modest but steady returns

Money market funds are considered among the safest mutual fund investments, though they are not completely risk-free. Investors should pay attention to the prevailing interest rates when investing in these funds.

Features of Money Market Mutual Funds

1. Provide current income to investors
2. Managed to maintain a stable share price
3. Widely used for parking surplus cash or funds required at short notice
4. Returns are largely influenced by short-term interest rates
5. Suitable for risk-averse investors

How Money Market Mutual Funds Work

Money Market Mutual Funds pool money from investors and invest it in short-term, high-quality debt instruments. The income generated from these investments is distributed among unit holders in the form of returns.

MMMFs are often compared to a high-yield savings bank account because they offer:

1. Easy redemption
2. No long-term lock-in
3. Electronic fund transfer facilities

However, unlike bank deposits, returns from MMMFs are not guaranteed and depend on market conditions.

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