Modular multilevel converters (MMCs) are quickly emerging as a suitable technology for a voltage-source converter-based high-voltage direct-current (VSC-HVDC) transmission systems due to its numerous advantages as reported in literature. However, for a large DC-network, MMCs require large numbers of sub-modules (SMs) and switches, which makes its modeling very challenging and computationally complex using electromagnetic transient (EMT) programs. Average Value Model (AVM) provides a relatively better solution to model MMCs by combining cells as an arm equivalent circuit. Circulating current is an important issue related to the performance and stability of MMCs. Due to circulating currents, power loss in a converter increases as root mean square (RMS) values of the arm current increases. The traditional method for inserting SMs in each arm is based on direct modulation, which does not compensate for the arm voltage oscillations, and generates circulating current in each leg of a three-phase MMC. This paper presents a new method for reducing the circulating current by adding 2nd and 4th harmonics in the upper and lower arm currents of an MMC. Less capacitor energy variations are obtained by the proposed method compared to traditional direct modulation methods. The proposed method is tested on a common symmetrical monopole (point-to-point) MMC-HVDC system using vector current control strategy in PSCAD/EMTDC software. Analytical and simulation results show the effectiveness of the new method in minimizing the circulating current and arm voltage oscillation reductions as compared to the direct modulation approach.