Mutual funds are the best investment avenues for small investors. They combine safety, liquidity and ease of operation. For those who are wary of playing in the stocks market, mutual funds are the ideal method to earn high returns with diversification of risks.

Now that you have decided to invest in mutual funds, you could do with a little knowledge about the different types of funds. There are basically two types of funds – equity and debt. Equity funds invest in stocks of companies. The portfolio of such funds includes both blue chip and emerging companies. Debt funds invest in corporate and government bonds. A special type of debt fund is the money market mutual fund.

As the name implies, money market mutual funds invest in near-money instruments like Treasury Bills, government securities and Commercial Paper. There are two main advantages of such funds:

• They provide investors with risk-free yield.
• They give the benefit of returns from the money market without the huge outlays required by money market instruments.

Money market instruments are usually available only to those with substantial amounts available for investments. However, money market mutual funds accept amounts as low as $500. This means the investor has an option of earning assured return for low investment.

Money market mutual funds are an attractive option in the following circumstances:

• You have surplus cash resources but have not yet decided upon the final long-term investment choice. Most money market mutual funds have short lock in periods and so you can park your funds until you make up your mind.
• When you receive a huge amount, say from sale of a house or on maturity of some investment, but you have a liability on the horizon shortly, investing in money market mutual funds for the intervening period allows you to earn high return with minimum risk. This is an efficient way to handle idle cash.
• When you plan to switch between mutual fund schemes, transferring the funds to a money market mutual fund of the company, gives you enough time to decide on where to move your funds ultimately.

Money market mutual funds invest in US Treasury Bills, government securities, bonds of government-sponsored enterprises and municipal notes. The returns from money market mutual funds can be taxable or tax-free. While most funds are taxable, tax-free units are issued by those entities that are exempt from federal, state or local taxes. Choosing such a scheme would maximize your post-tax returns, especially if you are in the higher tax bracket.