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Introduction
The money market is preferred by a lot of market investors for its low-risk factors and the liquidity of the funds. The money market is a subject of growing importance. Money markets are useful for the central bank of a country to control liquidity. Furthermore, they are also convenient for drafting monetary policies of the country.
It is a market for short-term investment and comparatively secure in nature. It is essential to understand what the money market is and how transactions take place in that market. This article is a compact guide to the money market. “Money market fund vs liquid fund” is also discussed in this article to clear out any confusion about these terms.
What is Money Market
To put it simply, the money market is a market where short-term funds are traded. Generally, the trades are not over a duration of one year. Money market funds generally invest in vehicles that are stable and it does not extend the maturity period of thirteen months. Therefore, the funds can be liquidated easily. The money market is made up of banks, non-banking finance corporations (NBFCs), and acceptance houses.
Individuals can also invest in money markets by buying funds, treasury bills, and certificates of deposit (CDs). These are some of the money market instruments. Having a clear idea about these instruments is also necessary for a better understanding of the money market.
Money Market Instruments
There are several types of money market instruments. Let us look at some of them in detail.
- Treasury Bills: Treasury bills do not offer lucrative returns. Nonetheless, they are possibly the safest money market instrument. These bills are issued by the government. They involve the least risk. These bills are sold through auction and bought by investors. The price of value is to be subtracted from the value it generates at the time of maturity is what the buyer gets. The government of India issues three types of treasury bills with maturity periods of 91 days, 182 days and 364 days.
- Certificates of deposit (CDs): Unlike treasury bills, CDs are issued by banks and can have several maturity periods like 3 months, 6 months, or 12 months. This instrument of the money market is very liquid in nature. CDs are quite similar to FDs (fixed deposits) but generally, CDs deal with a bigger amount of money and they are less strict than FDs.
- Commercial Papers (CPs): Commercial Papers are a type of money market instrument and they have higher risks than the two instruments mentioned above. However, CPs generally yield higher returns than those two as well. They are short-term loans bought and sold generally by business organisations to raise capital when in need. CPs can have a very short maturity period, starting from a day.
- Repurchase Agreement (Repo): Repurchase Agreements are loans that are bought and sold by parties with the intention of repurchasing them on a previously determined date and at a predetermined rate. However, the parties have to get approval from the RBI for these transactions. Government securities, treasury bills, etc. are generally transacted which also requires approval from RBI.
These are some of the instruments of the money market that function in India. Let us now have more clarity on the liquidity aspect of the money market.
Money Market Funds vs Liquid Funds
Are money market funds liquid? Are liquid funds and money market funds the same thing? These are some common questions we wonder about while getting introduced to it for the first time.
Money market funds are highly liquid funds. Liquid funds are generally very short-term debt securities meaning they mature within a very short period of time and hence can be converted to cash quickly.
Money market funds such as treasury bills, CDs, and CPs which have a maturity period of up to 91 days are considered liquid funds. Liquid funds although comparatively safer than the other mutual funds yield better returns than saving bank accounts.
Conclusion
One thing to keep in mind while dealing with money market funds is that they are not exempt from market risks. However, the risk factors are considerably low in this case. These funds are acquiring growing popularity among business organisations and individuals for low risk and easy liquidity.
