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The Monetary System Committee provided the basis and requirement for a money market to the RBI in 1985. The RBI set up a working group for the development of the money market in 1987 and introduced a lot of rules and regulations for the group. The lack of liquid funds in the market was the first order of the house and it led to the development of the Discount and Finance House of India.
Financial Reform in India
The history of money market funds (MMFs) comes after the financial reform of 1990. Financial policies were changed in large numbers and liberalisation was welcomed in the form of new programmes. The restructuring of the regularisation system existing before the nineties was confirmed as part of the new reforms. This also led to reforms in the way liquid cash was to be handled in the investment market. The most recent development of this change was the introduction of money market funds.
This was a completely new category of mutual funds that did non exist before in the system and paved the way for a lot of money managers to step in and create a low risk, diverse platform to create opportunities for traditional investors. Call money, Term money, Commercial paper, certificate of deposit, treasury bills and forward contracts were introduced to boost this reform of a new monetary and government enabled security policy.
Money Market MFs
Mutual funds subject to the money markets were introduced in April 1991 to induce customers to
- a) take more interest in the mutual funds market,
- b) have access to many more short-term financial gain instruments,
- c) to have complete control and liquidity of their funds and to
- d) give more power to the rise of the financial reform in the country.
The features of the MMFs
The different features of the money market mutual funds are listed below
- High liquidity options
- Security of investment
- Guarantee of fixed returns
- Complete control
- Multiple options
- Regulated by the RBI
These are some key points to keep in mind when investing in money market funds today. Also, it should be noted that money market funds are not open to individual investors. They have to go through mutual funds to invest in them.
Reasons to invest in the money market
Here we will discuss the many benefits of investing in the money market. The history of money market funds has been favourable to the Indian investor for more than 3 decades. And it has also started diversifying its products and facilities in keeping with the global trends.
One of the main reasons to invest in money market funds today is the high liquidity it offers. The use of short-term securities launched by the RBI ensures that the market maintains the liquidity that is necessary for the economy to function.
The liquidity further allows for the quick release of funds. Investors can have access to their investments within the span of one to two days. This gives way for more institutional investors to partake in the MMFs and also enjoy higher interest rates than those of other loan products. When investing in multiple options, it is a good idea to use the liquidity offered by money market funds to stack up the interest income received from other avenues. So, all excess funds have a safe place to go. Also, as the market is directly monitored by the RBI, the safety of this market is absolute. This is the one market that is important for the community, economy and banking system. Hence it is regulated through many different policies.
Conclusion
It should be noted here that although the money market funds enjoy a lot of privileges, it comes with their issues as well. The interest rate offered by the money market funds today is regulated by fiscal policy. So that can change as per market requirements. Not to mention the fact that these only work in the short run. Long term investors will not be interested in capitalising on the liquid fund offering only temporary benefits.
