Why do Indian Corporates Love Money Market Funds?

4 min read

Written by Shantanu Bante

Do you know that there are more than $60 billion which is 4.86 lakh crores rupees parked in money market funds, out of which corporates owned 78% of the total assets. That’s huge, right?

In today’s KOFFi break, we will try to understand why money market funds are so prominent in Indian corporations. And how you as a SME business owner can learn from them.

Firstly, What Are Money Market Funds?

Money market funds are short-term debt funds that invest in highly liquid money market instruments like government securities, commercial papers, treasury bills, certificates of deposits, bonds, etc.

But, Why Are Indian Corporates Too Dominant In Money Market Funds?

Corporates and businesses have a huge amount of short-term fund reserves with them in the form of payrolls, GST dues, invoice payables, etc. For this, corporations need a very efficient financial instrument to manage this money.

Money market accounts are perfect for businesses for their short-term funds management due to their characteristics, like low-risk, stable capital appreciation, better liquidity, better returns than fixed deposits, diversification in investments like (bonds, commercial paper, T-bills, certificate of deposits, etc.)

These characteristics make money market funds an ideal option for businesses for short-term fund management after fixed deposits.

To better understand, let’s know the difference between fixed deposits and money market funds.

What is the Difference Between Money Market Funds and Fixed Deposits

Criteria	Money Market Funds	Fixed Deposits
Investment v/s Deposits	It’s an investment product. It pools investor money and invests in short-term, very low risk and highly liquid assets.	It’s a term deposit at a banks Where money is held as deposits for a fixed period.
Interest Rates/Returns	Very low fluctuating rates due to money market interest rates movement. Generally, give up to 7% returns on investment (1 yr)	Typically pay a fixed or variable interest rate set by banks. Banks generally offer up to 5-6% interest p.a on Fixed deposits.
Funds Securities	These funds are invested in very high-quality credit instruments. Which makes them secure. These funds are not banking product, they are investment products that’s why they came into SEBI regulation.	They are banking instruments, which is why they came under central bank regulation. Also, Fixed deposits are federally insured by the central banks, up to ₹ 5,00,000 per depositor.
Minimum Balance Requirements	These are not bank deposits. So there are no minimum balance requirements to have. Instead, they have a minimum investment amount.	There is a minimum deposit required to make a fixed deposit in the bank. These balances vary from bank to bank.
Liquidity	Provide you with high liquidity. So you can easily withdraw your funds whenever needed by fund transfer.	Zero liquidity. You can’t withdraw your funds before the maturity period is over. If you did, the bank will charge a premature withdrawal penalty.
Management Expertise	There is no management expertise needed. There is a fund manager who will manage your funds to get better returns	Simple to manage You don’t have to do anything before the maturity period is over.
Fees	Funds charge an expense ratio to cover the cost of managing funds. Which typically around 0-1%	Zero fees Only premature withdrawal penalty charge in case of early withdrawal

Let’s Try To Understand Benefits Of Money Market Funds

Money market funds offer various benefits for corporates and businesses, which makes it a valuable fund parking option:

High liquidity: Money market funds invest in very liquid money market securities that have a maturity period from a day to weeks or months. Which allows corporations to easily access your funds when needed.
Risk management: These funds invest in very low-risk and high-credit-quality securities, which provide stability and security for corporate parked funds.
Diversification: Money market funds typically have a very diversified portfolio of government and corporate securities. Which helps you to spread your money risk.
Short-term funds: Corporates and businesses have huge amounts of short-term surplus funds in their current accounts where they get zero interest. Money market funds provide better than current accounts and short-term FDs.
Cash management: Corporates and businesses have huge amounts of short-term surplus money in their current accounts where they get zero interest. Money market funds provide better than current accounts and short-term FDs.

But, What SME Business Owners Can Learn From These Corporates?

Currently, there are more than 633 lakh registered SMEs in India. Which only use current accounts and short-term FDs to manage their short-term business funds. These instruments are too old and inefficient to fund parking.

More than $200 billion of businesses’ short-term funds were parked in short-term FDs where their money is just losing its true potential. Whereas they can learn from corporations where they use different efficient options rather than going only behind traditional ones.

SMEs need to explore more financial worlds to optimise their business finance. They need to educate themselves and be aware of options other than traditional ones.

Final Thoughts

Money market funds are a great alternative for Indian businesses of MMAs. Since MMAs are not very prominent in the Indian financial system. Money market funds give a better option to businesses for their short-term cash management. But still, Indian SMEs are not utilising it properly.

Indian SMEs need to learn from Indian corporates, how they manage their short-term cash efficiently and also make earning returns. Indian SMEs need to be aware of other better financial options rather than traditional banking ones. Learning more about money market funds could be a great start for improving their business finances.

Did you find this information valuable? Share this blog with someone who is a business owner and still relies on traditional banking options for their business finances. Help them make informed financial decisions just as you do!

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Shantanu Bante

Shantanu is a management student with a strong interest in fintech. He enjoys creating valuable and insightful content to increase financial awareness. Currently, he is working as a Marketing Manager at KOFFi.