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Money Market

The money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders. The market offers very high liquidity as the assets can easily convert into cash. Thus, it helps businesses and the government in meeting their working capital requirements.

Investments here fall under the range of a day to a year, with the risks and gains both being low.

KEY TAKEAWAYS

The money market refers to the financial segment for the trade of liquid and short-term assets that can be easily converted into cash. Businesses and governments particularly benefit from this market as it helps in meeting their working capital requirements.

Unlike a capital market where long-term securities are exchanged, here the trade investments range from a day, three months, 365 days, etc.

Longer the period of investment, the higher the risk and gains. As such, the assets traded here come with low risk and gains.

Due to high transaction value, market investors are large insurance companies, governments, NBFCs, banks, credit institutions, etc. Retail investors invest using money market funds and accounts.

Explaining money market

A cash marketplace presents problems to be had coins to companies, establishments and governments for everyday operations. For example, companies borrow short-time period loans to be had withinside the marketplace to meet each day commercial enterprise wishes consisting of uninterrupted electricity, well-timed salary payments, etc. In 2020, the American cash marketplace belongings grew to seventy-seven trillion, which throws mild at the huge position the marketplace performs in maintaining liquidity withinside the economy. The buying and selling contraptions are open marketplace finances and short-time period securities that include excessive liquidity. As such, belongings may be without problems transformed into coins.

Moreover, the tenure of investments tiers from an afternoon to a year, typically now no longer extra than 365 days. Since investments with longer tenure earn better, the belongings traded right here have low dangers and gains. Thus, cash markets vary from capital markets wherein long-time securities trade, and rates, dangers and returns are excessive. Besides, the excessive-fee transactions make it tough for retail traders to deliver finances.

The fundamental marketplace traders are coverage companies, governments, NBFCs, banks, and credit score establishments, amongst others. Retail traders can make investments in their financial savings via the oblique direction of mutual finances and specialised banking accounts.

Money Market Functions

The marketplace enables to carry stability among the call for and delivery of short-time period price range, bringing an economic equilibrium. By making price range to be had to diverse extraordinary members withinside the marketplace, the marketplace promotes the monetary boom of the economy.

Governments can maintain a test of the liquidity withinside the u.s . via way of means of influencing cash delivery. In addition, as defined above it enables maintaining the management of deflation or inflation. Also, the marketplace promotes saving and funding via way of means of giving a platform to wholesale in addition to retail buyers for investing/borrowing of the price range.

Call money is one of the most liquid instruments. The validity is generally one working day. Banks can face shortfalls that can be solved by borrowing through call money. In contrast, those with surplus cash can invest in other banks through call money.

Call money work a , statutory reserves the minimum cash balance which banks must hold as part of the central bank’s mandate to ensure enough liquid cash for daily operations. The investment is available to other financial as well. Borrowing and lending take place at the call rate. With no organized market, the transactions generally occur using phone calls/emails/faxes.

T bills are issued by a country’s central bank on behalf of its government. The government often raises funds through Treasury Bills that provide quick money. In the money market, it is considered one of the safest investments due to the government backing. They don’t offer an interest income.

T-bills are issued at a discount and redeemed at par, with the investor pocketing the difference as profit. The tenure of T-bills is generally from 14 days to 364 days.

Companies generally use commercial papers to fund their short-term working capital needs, such as payment of accounts reversible, inventory purchases, etc. However, these are unsecured in nature. As such, in case of liquidation of the company, they will not have priority against other secured financial short-term instruments.

CPs come with an average maturity of two odd months. However, just like the Treasury Bills, these are also issued at a discount, and therefore, they don’t come with separate interests.

A certificate of deposit is a type of time deposit with the bank. Only a bank can issue a CD. Like all other time deposits, CDs also have a fixed maturity date and cannot be withdrawn before maturity. This acts as a major disadvantage for the instrument.

Repo is a repurchase agreement with repo as its abbreviation. For example, Bank A in need of funds, with Bank B having surplus funds. Bank A will enter into an agreement with Bank B to sell its securities (mostly Treasury Bills). Bank B will receive the required funds. However, on a fixed date in future, the Bank A will repurchase these securities from Bank B as part of the agreement.

These are very short-term in nature. Tenure ranges from overnight to a month, while the securities can be directly transferred without the credit risk

Money Market Funds

Retail traders can advantage oblique get admission to this marketplace thru cash marketplace finances which might be mutual finances with a portfolio of liquid instruments. The portfolio typically includes a mixture of CDs, treasury bills, industrial paper etc. It gives excessive liquidity, short tenure and occasional risk.

Retail traders should purchase and promote gadgets of the mutual fund on the winning NAV thru the mutual fund marketplace, part of the capital marketplace. Regulators are seeking to broaden mechanisms to make sure the resilience of this quarter because the pandemic uncovered lots of its vulnerabilities.

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