Money market

Key Takeaways

1. The money market deals with trading of short-term securities

2. For money market funds, the maturity period could be one day or one year.

3. The short maturity period and minimal risk, these are the two main characteristics of the money market fund.

A money market is the trading market for short-term instruments with maturities of up to a year. 

Know more

Money market instruments are characterized by a high degree of safety and low comparative returns. 

Money market instruments include: –

  • Commercial papers
  • Certificate of deposits
  • Repurchase agreements

Money market meaning

The money market is a type of market where short-term investments are traded. Long term financial assets are traded in the debt market. The money market provides a high safety but with low return. Short maturity periods and high liquidity are the two features of money market instruments. Money market transactions are significant in amount and high in volume. Therefore, the major players in the money market are central govt., state govt., mutual funds, commercial and cooperative banks, PSU’s, non-financial institutes, and insurance companies.

Money market and capital market

The money market deals with trading of short-term securities, while the capital market deals with long term securities. The capital market inherits a comparatively higher risk than the money market, but returns in the capital market are also higher. In the money market investment duration of 365 days or less than that. In the capital market investment duration is more than one year; it could be 3 years, 5 years, or 10 years. The investor who wants to fulfill short term credit needs invests in the money market, and for the long-term needs, they invest in the capital market.

Money market instruments / what are money market instruments?

Money market instruments are treasury bills, commercial papers, certificates of deposit, money market funds, repurchase agreements, tax-exempt money funds, money market accounts, etc.

Money market fund

Money market funds are open-ended funds. Money market fund is the investment in short term securities such as cash, cash equivalents, and debt securities like treasury bills and commercial papers. The short maturity period and minimal risk, these are the two characteristics of the money market fund. For money market funds, the maturity period could be one day or one year. Here short-term financial assets are those who are easily converted into cash within a short duration.

How does the money market work?

Investors invest in the money market to manage their short-term financial needs. The maximum maturity of money market funds is one year. The fundamental function of the money market is to reduce the variation in NAV of the money market funds.

Features/functions/characteristics of money market

  1. As the impact of volatility on the money market is low, it provides stability to the investor,
  2. Investors can invest in highly liquid cash equivalents assets through the money market, which means the money market also provides high liquidity. An Investor can liquidate the asset at any time.
  3. Money market funds have low risk and short maturity; thus, it provides security to the investor.
  4. The investor can liquidate their money market fund in short duration, depending on their maturity period.
  5. The money market includes many securities; thus, it helps the investor to diversify their investment portfolio.