Money Market Fund: What the One-Year Maturity Cap Means for Your Short-Term Cash

Say you have sold a flat and the registry for the next one is eight months away. Or you run a small business and keep a few lakh aside for the GST and advance tax bills that come every quarter. That money has a date on it. You can’t put it in equity, and a savings account feels like a waste. This is the gap a money market fund is built for. It is a debt mutual fund that may only buy instruments maturing within a year, and that single rule shapes almost everything about how it behaves.

We’ll go through what SEBI’s rule book actually says about the category, what “money market instruments” means in law, how the fund’s risk label is worked out, when your purchase or redemption gets that day’s NAV, and a worked example of a made-up portfolio. The rules quoted here come from SEBI’s Master Circular for Mutual Funds as on March 20, 2026 and the SEBI (Mutual Funds) Regulations, 2026. Every rupee figure in the examples is hypothetical.

The one-line definition of a money market fund

SEBI’s table of debt scheme categories gives the money market fund exactly one characteristic: investment in money market instruments having maturity up to 1 year. The uniform description every such scheme must carry is “an open ended debt scheme investing in money market instruments”. That’s it. No minimum allocation percentage, no rating floor written into the category line, no sector rule.

What makes it interesting is how that test differs from its neighbours on the same table. Look at how SEBI defines the short-end categories:

• Overnight fund: overnight securities with maturity of 1 day.
• Liquid fund: debt and money market securities with maturity of up to 91 calendar days.
• Ultra short term fund: debt and money market instruments such that the Macaulay duration of the portfolio is between 3 months and 6 months.
• Ultra short to short term fund: the same idea, with portfolio Macaulay duration between 6 months and 12 months.
• Money market fund: money market instruments with maturity up to 1 year.
• Short term fund: portfolio Macaulay duration between 1 year and 3 years.

Notice the two different yardsticks. Overnight, liquid and money market funds are defined by the maturity of what they hold. The duration-band funds are defined by the Macaulay duration of the whole portfolio, which the circular says is measured at portfolio level. A duration-band fund can in principle hold some longer paper as long as the average stays inside the band. A money market fund can’t hold anything maturing beyond a year, full stop. That is a cleaner promise, and for parked cash a clean promise is worth a lot.

What counts as a money market instrument

The term isn’t left to the AMC’s imagination. Regulation 2(ff) of the 2026 Mutual Funds Regulations says money market instruments include commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificates of deposit, usance bills, and any other like instruments specified by the Reserve Bank of India.

In plain terms, the list splits into two kinds of paper. Government paper, meaning T-bills and G-secs with up to a year left. And short-term paper from banks and companies, such as certificates of deposit and commercial paper. The government leg carries no credit risk in the usual sense. The bank and corporate legs do, and that’s where two money market funds with the same label can turn out quite differently.

So when you open a factsheet, the first thing we’d look at is the split between government paper, bank CDs and corporate CPs. The second is who those corporates are.

The one-year cap limits how much a rate move can hurt you. It says nothing about whether the borrower pays you back.

The 10% liquid assets cushion

There’s a rule many investors never hear about. SEBI requires all open-ended debt schemes, except overnight funds, liquid funds, gilt funds and 10-year constant maturity gilt funds, to hold at least 10% of net assets in liquid assets. Money market funds are not on the exception list, so the 10% floor applies to them.

“Liquid assets” here has a narrow meaning. The master circular defines it as cash, government securities, T-bills and repo on government securities. If the fund’s holding of these drops below 10%, the AMC has to restore it before making any further investments.

The circular also says these liquid assets are not counted when deciding whether the scheme meets its category characteristics. But for calculations such as Macaulay duration, the riskometer and issuer, sector and group limits, the base is 100% of net assets. In other words, the cushion sits on top of the category rule rather than replacing it.

How the risk label is worked out

Every debt scheme has to place itself in one cell of SEBI’s Potential Risk Class (PRC) matrix. It’s a 3 by 3 grid. One axis is interest rate risk, measured by the scheme’s Macaulay duration. The other is credit risk, measured by a weighted Credit Risk Value, or CRV. We covered the broader riskometer in our piece on the mutual fund riskometer; the PRC is the debt-specific companion to it.

On the duration axis, Class I means a maximum Macaulay duration of 1 year, Class II up to 3 years, and Class III any duration. Macaulay duration is the weighted average time to a bond’s cash flows, as Investopedia’s explainer puts it, and a coupon-paying bond always has a duration shorter than its maturity. So a portfolio where nothing matures beyond a year cannot have a duration above a year. A money market fund lands in the Class I row almost by construction.

The credit axis needs more work. SEBI’s scoring table gives each holding a value:

• G-sec, state development loans, repo on government securities, TREPS and cash: 13
• AAA: 12
• AA+: 11
• AA: 10
• AA-: 9, and so on down to 1 for below investment grade, with unrated paper at 2

Class A needs a portfolio CRV of 12 or more, Class B 10 or more, and Class C anything below 10. The CRV is weighted by each holding’s share of AUM, using the dirty price, meaning accrued interest included.

Here is the twist that matters for money market funds. CPs and CDs carry short-term ratings, not AAA or AA. SEBI says that for such instruments the CRV is based on the lowest long-term rating of an instrument of the same issuer across rating agencies. If the issuer has no long-term rating, the most conservative long-term equivalent from the agencies’ short-term to long-term mapping is used. So a top short-term rating on a CP doesn’t automatically earn a 12. It depends on how the issuer’s long-term paper is rated.

A worked example: scoring a made-up portfolio

Let’s build a hypothetical money market fund with ₹1,000 crore of net assets. All names and numbers are invented for illustration.

• ₹100 crore in TREPS and cash, scoring 13
• ₹200 crore in 364-day T-bills, scoring 13
• ₹400 crore in bank CDs, where each issuing bank’s lowest long-term rating is AAA, scoring 12
• ₹300 crore in CPs of NBFCs whose lowest long-term rating is AA+, scoring 11

The weighted CRV is (0.10 × 13) + (0.20 × 13) + (0.40 × 12) + (0.30 × 11). That’s 1.3 + 2.6 + 4.8 + 3.3, which comes to 12.0. Just enough for Class A. With duration under a year, the fund sits in cell A-I, which SEBI describes as relatively low interest rate risk and relatively low credit risk.

Now suppose the fund manager swaps those NBFC CPs for paper from issuers rated AA, scoring 10. The CP line drops from 3.3 to 3.0, and the total falls to 11.7. That’s below 12, so the fund can no longer sit in Class A. It would be Class B, moderate credit risk, even though nothing about its maturity profile changed.

This is why the PRC cell is a useful filter. SEBI also treats the cell as a ceiling: if a scheme’s positioning would push its risk above the maximum for its chosen cell, that is a change in a fundamental attribute of the scheme, and unitholders have to be informed of the cell and any changes through SMS and a link on the fund house’s website. A fund that has chosen A-I has publicly committed to staying there.

The duration side is simpler. If every holding pays back in a single lump at maturity, its Macaulay duration equals its remaining life. Say the TREPS have 1 day left (call it 0), the T-bills average 0.6 years, the CDs 0.5 years and the CPs 0.4 years. The weighted duration is (0.10 × 0) + (0.20 × 0.6) + (0.40 × 0.5) + (0.30 × 0.4) = 0 + 0.12 + 0.20 + 0.12, or 0.44 years. Comfortably Class I.

When your money gets that day’s NAV

Liquid and overnight funds have their own 1:30 pm purchase cut-off. Money market funds don’t. They fall under the rules for “all schemes and plans other than liquid and overnight fund schemes”, and those work like this:

• Buying: you get the closing NAV of the day on which your money is available for the scheme to use, whatever the size or time of the application. The cut-off for the funds to reach the scheme’s bank account is 3:00 pm.
• Redeeming: an application received up to 3:00 pm on a business day gets that day’s NAV. After 3:00 pm, or any time on a non-business day, you get the next business day’s NAV.

A quick illustration. You place a redemption at 2:40 pm on a Monday that is a business day. Monday’s NAV applies. Place it at 3:20 pm and Tuesday’s NAV applies. On a purchase, what counts is when the money lands with the scheme, not when you clicked the button. If your bank transfer reaches the fund’s account at 4 pm, that day’s NAV is gone and the next business day’s applies.

For parked cash the one-day difference is usually tiny. It matters more when you’re timing an exit to meet a payment date, so leave yourself a buffer.

Two quieter rules worth knowing

Valuation. SEBI says all money market and debt securities, including floating rate ones, are valued at the average of security-level prices from valuation agencies. Those prices follow a waterfall approach. Traded securities are valued on traded yields. Government securities, T-bills included, use the volume weighted average yield of trades in the last hour; other money market and debt securities use the volume weighted average yield of all trades during the day. So your NAV reflects where similar paper is actually changing hands, not a smooth accrual line.

Swing pricing. The swing pricing framework applies to open-ended debt schemes other than overnight funds, gilt funds and 10-year gilt funds, so money market funds are covered. It applies only to scenarios of net outflows. In normal times there is a partial swing at the AMC’s discretion, within parameters AMFI sets. During market dislocation, a full swing is mandatory for high-risk open-ended debt schemes. In practice, a heavy redemption day could mean the NAV you exit at is adjusted, and the scheme information document is where the AMC has to set out its swing pricing provisions.

Comparing money market funds before you pick one

Since every fund in the category runs under the same maturity cap, the differences come from three places: what they buy, what they charge, and how they’ve behaved. On the last point, SEBI makes it easier than for most categories. AMCs have to publish performance on the AMFI website, and for money market funds, along with overnight, liquid, ultra short and low-duration funds, that includes returns over 7 days, 15 days, 1 month, 3 months and 6 months, on top of the usual 1, 3, 5 and 10 year and since-inception figures. The disclosure is updated daily on the previous day’s NAV.

A few things we’d check side by side:

• The PRC cell. A-I and B-I funds can look alike on returns in a calm year and very different in a bad one.
• The share of corporate CP versus bank CDs and government paper in the latest monthly portfolio.
• Concentration. One NBFC making up a big slice of the book is a risk the maturity cap doesn’t fix.
• The direct plan’s expense ratio. When every fund buys from the same short list of instruments, cost is one of the few things that sets them apart. Our explainer on direct vs regular plans walks through why.
• Exit load and payout timelines, which sit in the scheme information document.

If you only need cash for days, an overnight fund is the tighter tool. If you can live with a slightly longer horizon and want a defined maturity ceiling, the money market fund is the natural next step on the shelf. And whatever you park it in, the broader habit of sizing your risk to your time frame, which we cover in the pillar guide on risk management in trading, still applies.

Where it fits, and where it doesn’t

A money market fund suits money with a known date somewhere between a few weeks and a year away. It doesn’t suit money you might need at an hour’s notice on a Sunday, because redemption follows business-day cut-offs. And it doesn’t suit someone looking for a high yield, because the instruments it may buy are short and, in a well-run fund, mostly high quality. The rules keep interest rate risk small. Credit risk is the part you have to check yourself, and the PRC cell plus the monthly portfolio are the two places to do it.

Disclaimer: This article is for education only and is not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Examples use hypothetical figures. Consult a SEBI-registered adviser before making investment decisions.