Money market instruments

What Are Money Market Instruments?

Money market Instruments act as an investment machine for banks, the government and businesses. It grants them big, short term capital loans, which are at a low cost. Money market Instruments permit borrowers to meet their short-term goals. Besides, these instruments provide easy liquidity to lenders. These financial instruments are debt securities. They offer interest rates that are unguaranteed. The risk of non-refund is high in the money market. These instruments have high credit ratings. Investors who want to put their money in the short term use these financial instruments. They also get fixed returns on their investments. 

Difference between capital market and money market

• Capital Market

The place where stocks and bonds are traded is called the capital market. It is monitored every hour. The main goal of the institutions that enter into the capital markets is to raise money for their long-term purposes. This helps them to expand their businesses and increase their revenues. This is done by issuing shares and by selling corporate bonds.

• Money market

The money market is a short-term lending system. Borrowers take the cash they need to operate. Lenders use it to put their spare cash to work and grow. The money market is less risky compared to the capital market. However, the capital market is more rewarding compared to the money market. 

Types of Money Market Instruments

• Treasury bills

Treasury bills are provided by the Reserve Bank of India for the Central Government to raise money. They have maturities that are short term. Treasury bills are provided with three maturity periods. They are 91 days, 182 days, and 1 year. Treasury bills are issued at a discount to the face value. The difference between the initial value and face value is the return. Treasury bills are one of the best short term fixed-income investments. They are backed by the government of India. Hence, they are very safe. 

• Certificates of deposits

Certificates of deposits (CDs) are financial assets given by banks. They provide fixed interest rates on the amount invested. CDs have a limitation on the base investment amount. Hence they are more famous among companies than individuals. One can place their surplus in CDs for a short duration and earn interest on the same amount. The maturity period of CDs is from 7 days to 1 year. These are provided by banks. Financial organisations can provide a CD with maturity from 1 year to 3 years.

• Commercial papers

Large MNCs and businesses issue promissory notes. These notes are used to raise capital and meet short term needs. These papers are called Commercial Papers (CPs). These ventures have a high credit rating. Corporates, primary dealers (PDs) and All-India Financial Institutions (FIs) can issue Commercial Papers. Commercial Papers have a fixed maturity time. It is from 7 days to 270 days. Investors have an option to trade this financial instrument in the secondary market. They give higher returns compared to treasury bills.

• Banker’s Acceptance

A financial instrument built by an individual or a company on behalf of the bank is called Banker’s Acceptance. It mandates the issuer to pay the instrument holder a specified amount on a pre-decided date. This date has a range of 30 to 180 days. It starts from the date of issuance of the instrument. Banker’s Acceptance is provided at a discounted price. The real price is paid to the holder at maturity. The profit made by the investor is the difference between the two.

Some features of money market instruments

• Liquidity is high

Money market instruments offer high liquidity. These financial instruments produce fixed income for the investors. The short-term maturity makes the investments highly liquid. They are considered great replacements for money.

• Returns are fixed

These financial instruments are provided with a discount to the face value. Face value is the value that the investors get on maturity. This maturity is defined beforehand. 

• Investments are secured

Money market instruments are one the most secured investment paths. These investments have a high credit rating. The returns are decided in advance. Hence, there is no risk of losing your investments.

Functions of money market instruments

• Providing funds

These financial Instruments assist short-term funds to the private and public institutions who need finance for their working capital requirements. These funds are provided by discounting the trade bills through commercial banks, brokers, discount houses, and acceptance houses. Therefore, the money market instruments, in turn, can help the development of trade, industry and commerce within and outside the country.

• Surplus funds

These financial instruments provide banks and financial organisations a chance to use their surplus funds with profit. 

• The balance between demand and supply of funds

The money market instrument is an equilibrium between the demand and supply of funds that can be taken as loans. They allocate savings into investment mediums.

• Helping Financial strength

The money market provides help to stabilise the financial arena. It assists the smooth transfer of funds from one sector to another. Financial stability is crucial for the development of the industry.

Conclusion 

The money market is made for short term maturities. Money market instruments are tools used for raising capital. Money market Instruments act as an investment machine for banks, the government and businesses. It is a lending system. While borrowers use these instruments to raise funds, lenders use them to invest their surplus funds. This is opposite to the capital market.