What is the money market?
The money market is the unorganised market wherein short-term debt assets are traded. These investments have high liquidity and very short-term maturity, usually below one year.
The Money market is characterised by a considerably high level of security on investment and relatively low rates of return.
How does the money market help?
It helps to fulfil the huge yet short-term capital requirements of users.
It helps the central bank to regulate liquidity in the economy.
Apart from fulfilling short-term capital requirements, it also helps in the storage of short-term surplus funds.
The money market also helps in the development of the capital market, trade, and industry.
What are money market instruments?
Money market instruments are the debt securities that are traded in the money market.
The major types of money market instruments in India are as follows:
Treasury bills:
Issued by the government of India, treasury bills are one of the safest money market instruments. They are known as zero risk instruments. Hence, as the general rule goes, they also do not carry very attractive returns. They are issued by the government at a discount on their face value and repaid at par at the time of maturity. Usually issued for a period ranging from 14 days to 364 days, presently, there are three types of treasury bills viz. 91 day, 182 day, and 364-day treasury bills.
Certificate of deposits:
Also known as CDs, certificate of deposits are receipts that are issued against money deposited with a financial organisation or a bank. They are issued for a large sum of money and are freely negotiable. Lately, they have become the preferred investment choice for organisations given because they carry low risk while providing higher returns than those provided by the other money market instruments. They are also issued at a discounted price. They provide a shorter tenure compared with that of the treasury bills, ranging from 7 days to 364 days.
Commercial papers:
Also known as CPs, commercial papers are unsecured money market instruments issued in the form of a promissory note. They are issued by high-rated companies generally for a period of up to one year, to meet short-term debt obligations. Their maturity period is shorter comparatively, ranging from 1 day to 1 year. They provide higher returns compared with that of other instruments; hence, as a thumb rule, they carry a higher risk.
Banker’s acceptance:
Also known as BA, the banker’s acceptance is a document that promises future payment guaranteed by a bank. It is used in money market funds and typically specifies details such as date of repayment, amount, and details of the entity to whom the money is to be paid. Its maturity period ranges from 30 days to 180 days.
Repurchase agreements:
Also known as reverse repo or repo, the repurchase agreements are short-term secured loans among RBI-approved parties where one party sells securities to another with an agreement to repurchase it later at a higher price. The securities serve as collateral in this case; hence, these are secured loans.
Stock market vs. money market
Maturity of the instruments:
Money market instruments have a maturity period of essentially less than a year. On the other hand, the stock market aids in wealth creation only when invested for a long duration.
Risk involved:
Stock market investments are for a longer duration and have a higher risk factor involved whereas money market instruments are for the short term and have negligible risk involved.
Types of instruments:
The stock market has stocks of independently listed companies whereas the money market has T Bills, CDs, call money, BAs, repo, etc.
Money market funds
They are short-term debt funds that invest in money market instruments. They are suitable when the investment duration is short and risk appetite is low. They generate higher returns than fixed deposits for a similar duration.
Some of the high performing Money Market Funds in India are as follows:
Nippon India Money Market Fund
SBI Savings Fund
Aditya Birla Sunlife- Money Manager Fund
HDFC Money Market Fund
ICICI Prudential Money Market Fund
Who should invest in money market funds?
Beginners: Those who are new to investing would find themselves comfortable investing in money market mutual funds owing to their short-term maturity and low risk involved.
People looking for liquidity and high short-term returns: With MMMFs, you can get high returns as compared to financial institutions, in a short maturity period.
FAQs
Who regulates the Money market in India?
Both RBI and SEBI regulate the money market in India.
What is the taxation rule that applies to Money Market Mutual Funds?
According to the Income Tax Act 1961, mutual funds are subject to tax gains. However, capital gains in the short term are still taxable at 15%.
Are money market Instruments completely risk-free?
Though the risk factor is considerably low with money market instruments, they are not completely risk-free. There is always a chance of the borrower defaulting on payment or going bankrupt.
What is the importance of the Money Market?
The money market allows several organisations to meet their cash requirements by raising short-term funds. Helps the central bank to maintain liquidity in the economy.
What is the call money market?
Call Money Market is an essential part of the Money market wherein day-to-day surplus funds are traded for a short term varying between 1 to 14 days. If the loan term is for 1 day, it is referred to as ‘Call Money’ whereas if it exceeds one day, it is known as ‘Notice Money’ limited to a period of up to 14 days.
What is the auction of securities?
To determine the market price of securities, auction bids are called. The auction can be of various types. It can also be price-based or yield-based.
Are there any eligibility criteria to issue Commercial Papers? If yes, what is it?
Any organisation should meet the following criteria to issue Commercial Papers:
- Net Worth at least 4 Crore as per the last audit.
- Board Resolution authorising the company to issue CPs.
- Should have a working capital limit issued by a bank or financial institution.
- Credit Rating at least P2 or equivalent, issued by CRA, approved by RBI.
What is the difference between the money market and the Capital market?
The main difference lies in their tenure. The money market is the component of the financial market that allows short-term borrowings whereas the capital market is the one where short as well as long-term equity and debt securities are traded.
The capital market offers highly volatile instruments whereas the money market offers comparatively safer assets which hence transforms to the difference in their returns. The capital market has considerably higher returns than that of the Money market.
The capital market offers highly volatile instruments whereas the money market offers comparatively safer assets which hence transforms to the difference in their returns. The capital market has considerably higher returns than that of the Money market.
Blog Summary:
The blog talks about the money market, its main features, major instruments, and essentiality. It also outlines the major differences between the money market and the stock market. Money market funds are an essential feature when it comes to individual investors. This blog gives an insight into these. Finally, the FAQs discuss the topic extensively and cover every detail.