The money market is trading in short-term debt fund investments. At the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers. In any case, if it is characterized by a high degree of safety and a relatively low return in interest.
Money market mutual funds (MMMF) are short-run liquid investments that invest in high-quality money market instruments. It provides investors with reasonable returns along with good liquidity over a period of up to 1 year.
An individual may invest in this market by buying MM Mutual Funds, short-term certificates of deposit (CDs), municipal notes, or U.S. Treasury bills, among other examples. Traders and institutions are more commonly the buyers for other money market products such as eurodollar deposits, banker’s acceptances, commercial paper, municipal notes, federal funds, and repurchase agreements.
1. How do Money Market Mutual Funds work?
MMMF is used to manage the short-run cash needs. It is an open-ended scheme in the debt fund category which deals only in cash or cash equivalents. These securities have an average maturity of one-year; that is why these are termed as money market instruments.
The fund manager invests in high-quality liquid instruments like Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers, and Certificate of Deposits. This fund aims to earn interest for the unitholders. The main aim is to keep fluctuations in the funds’ Net Asset Value (NAV) to a minimum.
Money market funds can be compared with a savings account which comprises of cheque facility, the facility to redeem without lock-in period, and electronic money transfer.
Also read: Systematic Withdrawal Plan
2. Types of Money Market Instruments
As an investor, you should know the various money market instruments:
a. Certificate of Deposit (CD)
These are time deposits like fixed deposits that are offered by scheduled commercial banks. The only difference between Fixed Deposit and Certificate of Deposit is that you cannot withdraw a Certificate of Deposit before the expiry of the term.
b. Commercial Paper (CPs)
These are issued by companies and other financial institutions which have a high credit rating. Also known as promissory notes, commercial papers are unsecured instruments that are issued at the discounted rate and redeemed at face value. The difference is the return earned by the investor.
c. Treasury Bills (T-bills)
T-bills are issued by the Government of India to raise money for a short-term of up to 365 days. These are the safest instruments as these are backed by a guarantee of the government. The rate of return, also known as the risk-free rate, is low on T-bills as compared to all other instruments.
d. Repurchase Agreements (Repos)
It is an agreement under which RBI lends money to commercial banks. It involves the sale and purchase of agreement at the same time.