If you are an investing beginner, you might have wondered what is money market? There is also a likelihood that you have often been confused about what is the difference between a money market and a capital market. The former plays a very significant role in managing India’s financial system and fulfilling its participants’ short-term monetary requirements. This article will delve into the money market meaning and top money market options available for investors in India.
What is a Money Market Mutual Fund?
The money market in India is a special sector of the financial system through which investors purchase and sell short-term debt instruments for up to 1 year. These financial instruments are characterised by high liquidity and lower risks in the money market and typically have defined features.
These instruments thus help various entities, whether governments, corporations, or even banks, meet their short-term financial requirements. Key participants include almost all banks, mutual fund houses, and financial institutions, with the RBI acting as the regulator of the money market in India.
It is difficult to imagine fulfilling the short-term cash requirements without money market instruments. The Indian money market acts as an important facilitator between lenders and borrowers of best short term mutual funds within the country.
Objectives of Money Market Instruments
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Having received clarity on what is money market, let us explore the objectives of money market. Money market instruments have the following main objectives:
Short-Term Funding Requirements
The primary purpose of money market instruments is to satisfy the short-term working capital needs of various entities. It is hard to envision more effective financial tools for navigating cash deficits and surpluses than those found in the money market.
Accessed Flow of Funds
The financial instruments of the money market have an important role in integral and smooth fund exchange between short-term providers and borrowers. This smooth flow of funds ensures the best possible imbalance between the country’s demand and supply of short-term funds.
High Returns
The rare combination of liquidity and stability offered by money market financial instruments offers participants returns from the stock exchange. What better use can a prudent business make of its surplus funds for profit realisation than in money market instruments?
To summarise, money market instruments represent a channel where relatively novices can benefit from profits linked with markets. To this end, if you seek to balance your stability against liquidity, the instruments are best tailored to your needs.
Best Money Market Instruments
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Now that we have discussed the money market and its objectives, let us turn our attention to the finest money market instruments available to investors in India. The best money market instruments are:
Money Market Mutual Funds
Ever wonder what a money market mutual fund is? These funds pool resources into short-term money market instruments such as Treasury bills, Certificates of Deposits, and Commercial Papers. Investors consider them one of the best short-term mutual funds in India.
Generally, you are not subscribed to achieve blockbuster performance (the task of your principal mutual fund); the main goal is reasonable liquidity and satisfactory principal protection. The following are some money market instruments that can be utilised based on your requirements.
Treasury Bills
Treasury Bills, commonly known as T-bills, are crucial in the Reserve Bank of India’s liquidity management operations. The Reserve Bank issues Treasury bills on behalf of the Government. Treasury bills have become a popular financial instrument for mobilising resources in the face of short-term financial requirements.
These are risk-free sovereign securities available in 91, 182, and 364-day maturities with discounts on their face value. They are one of India’s rare financial instruments with nil default risk. So far, investors and financial institutions in India have resorted to them to invest their short surplus profitably.
Commercial Papers (CPs)
Commercial papers are issued by large corporate houses in India to satisfy the firm’s working capital requirements. They are simple, unsecured promissory notes with maturities ranging from seven days to a year.
It is important to recognise that CPs are completely regulated in India. The Reserve Bank of India allows only those issuers with strong credit ratings to issue commercial papers because these instruments imply moderate credit risks. A3 has the lowest credit rating and can widely issue commercial papers in India.
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Commercial papers’ returns are way above those of treasury bills. Large corporate houses in India usually depend on commercial papers to finance their working capital needs. Commercial papers, serving as a vital financial instrument within the money market, have facilitated the smooth transfer of funds between lenders—those investors with surplus capital—and borrowers, which typically comprise large corporate entities.
One of the favoured paths for investors seeking to gain returns on their surplus funds is through commercial papers. Most notably, the Reserve Bank of India has relaxed the issuance of these financial instruments in recent years, aiming to bolster business activities across the country.
Certificates of Deposit (CDs)
In India, numerous investors and corporations find themselves with surplus funds at their disposal. Traditionally, banks and financial institutions have leveraged their strengths to address short-term working capital needs.
With maturity periods that stretch from seven days to an entire year, commercial papers present returns that far exceed those of savings accounts. For high-net-worth individuals and major corporate entities in India, what could be a more advantageous means of generating short-term profits on their surplus funds than through certificates of deposit?
The market for commercial deposits in India is strictly regulated. High transparency is maintained regarding disclosures and the classification of the issuers’ risk profiles. Credit rating agencies in India meticulously grade these certificates of deposit to grade their relative risk profiles.
It is advisable to check these ratings before an investment to determine the expected default risks associated with it. However, one of the most flexible papers in India’s money market is the certificate of deposit. Going for large, reputable issuers will help you strike a favourable balance between risk and return.
Conclusion
Money market securities, including some of the best liquid funds, properly allocate short-term funds to meet the immediate working capital requirements of corporate houses, banks, and governments. If you prefer the right balance between liquidity and stability of returns, then money market instruments are the way ahead.
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- 20 Lac+ unique clients
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FAQs
1. What is a money market instrument?
Money market instruments are easily convertible short-term financing instruments into cash. They include commercial paper, treasury bills, money market mutual funds, securities lending and repurchase agreements, and interbank loans (loans between banks).
2. How long do money market instruments last?
Money market funds invest in secure assets such as CDs, Treasury bonds, or premium short-term corporate bonds with less than a year of maturity.
3. What is the concept of the money market?
Large volumes of extremely short-term debt instruments, like commercial paper or overnight reserves, are bought and sold in the money market. A money market account at a bank, a money market mutual fund, or a Treasury bill can all be used by an individual to invest in the money market.
4. What are the functions of the money market?
The money market is crucial in financing trade and commerce, price discovery, reserve management for banks, short-term lending and borrowing, and liquidity management.
5. What is the best example of a money market instrument?
The financial instruments traded in these markets are money market mutual funds, commercial paper, Treasury bills, term certificates of deposit, interbank loans, securities lending, and repurchase agreements (repos).
References
https://groww.in/p/money-market-instruments
https://scripbox.com/mf/money-market-instruments/#:~:text=Examples%20of%20money%20market%20instruments,of%20less%20than%201%20year.
https://cleartax.in/s/money-market-instruments
