Everything You Need To Know About Money Market Instruments And Their Types

Every investor invests in the securities market with a different investment goal. Some may invest in the long term to build wealth, while some may invest in the short term to earn quick profits. However, some investors focus on liquidity and choose investments they can easily convert to cash if they want the amount immediately. Such investors look towards money market instruments that contain high liquidity and the option to quickly convert to cash.

If your main investment focus is instruments with high liquidity, you can consider investing in money market instruments. This blog will help you understand everything about money-market instruments.

• Money market instruments are short-term, low-risk debt securities like Treasury Bills, Commercial Papers, Certificates of Deposit, and Repurchase Agreements.
• Money market instruments offer high liquidity, low risk, and stable returns, making them ideal for short-term investments.
• Investors can buy them through certified brokers or by investing in money-market mutual funds.

Money market instruments’ meaning refers to investment instruments that can be quickly converted to cash. This means you can sell these instruments easily and realise cash, which you can use for personal purposes. Investors invest in money market instruments to earn steady returns in the short term and convert their investments into cash when they need the money. Money market instruments are not traded on stock exchanges but on over-the-counter platforms. You can invest in money market instruments through certified brokers or a money market mutual fund scheme.

Here are the objectives of money market instruments:

• Short-term financing: It allows private investors, corporations, or governments to raise money for the short term.
• Cash management: Money market instruments allow businesses and financial institutions with surplus money to manage their cash efficiently by investing in them and earning returns.
• Interest rate benchmarking: Money market instruments help set short-term interest rates, which serve as a benchmark for various other financial instruments.

Here are the types of money market instruments:

• Certificate of Deposit: The operations and procedures of a Certificate of Deposit is similar to Fixed Deposits. Maturities range from 7 days to 1 year for banks and up to 3 years for financial institutions.
• Commercial Paper: These are unsecured short-term promissory notes issued by large corporations. They are generally issued at a discount.
• Treasury Bills: The government issues Treasury bills to meet its short-term capital needs. They are issued at a discount and redeemed at face value.
• Repurchase Agreements: These are short-term loans where the borrower sells securities and agrees to repurchase them at a later date.
• Banker’s Acceptance: These are short-term credit instruments created by banks and guaranteed by banks. Their maturities range from 20 to 180 days.

Money market mutual funds are ideal investment instruments for investors looking for liquid short-term investments. They are ideal for risk-averse investors whose main focus is earning steady returns with high liquidity. Furthermore, they are ideal for investors who are looking for a stable, liquid place to keep emergency funds.

Here are the factors to consider before investing in money market mutual funds:

• All money market mutual fund schemes have a short tenure and are ideal for short-term investments.
• A money market mutual fund's lower expense ratio indicates a higher yield, while a higher expense ratio indicates a lower yield.
• Money market mutual funds are subject to long-term and short-term capital gains.
• You can buy money market mutual fund units at their current Net Asset Value (NAV). 

Here are the pros and cons of money market instruments:

Pros:

Money market instruments provide more liquidity than fixed-income instruments, and there is a typical lock-in period. Investors can sell these instruments any time they want and realise cash.

Cons:

There is no capital appreciation benefit, and money market instruments are not traded on stock exchanges. The buying process is complex, and the instruments offer lower returns than market-linked instruments.

Money market instruments offer stable returns and high liquidity, making them ideal for conservative, short-term investments. Most investors invest in money-market mutual funds as the buying process is simpler and the returns can be higher. Now that you know what are money market instruments, you can consider adding them to your portfolio.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.