Investors are always on a lookout for low-risk investment options which would offer them good returns while maintaining high liquidity. One of the best instrument for these investors is the money market funds, which is specially designed for the same aspect. It is provided with shorter-term maturity of up to one year and high securities. It is thus a safer and more preferred option for the investors in India who do not want to tolerate higher risks.
How Does It Work?
Money market funds can be considered as the financial instrument which comes with a short term maturity period of up to one year. However, some of the plans can be extended further depending on the type of instrument and financial organization. The funds offered here are basically debt securities with a fixed rate of interest. It can be, thus, used as a tool to raise capital by the issuers.
Types Of Money Market Funds
The money market in India is a collection of various submarkets, each having a different instrument varying on important scales such as maturity period, risk-involvement, etc. Here are the four types of money market funds that can be considered in the country-
1. Treasury Bill
Treasury bills are the ones backed by the government and thus, it is one of the safest options when it comes to types of money market. Issued by the Government of India, it raises money for a short-term period of up to one year. The return in this specific type is guaranteed, which is why the treasury bill is also known by zero default risk investment.
- No rate of interest involved
- Can be availed at a discount on face value
- Comes with short maturity of up to one year
2. Commercial Paper
Companies or any financial institute that have a higher credit rating issue commercial paper (CPs) or promissory notes. It is thus an unsecured instrument issued with a discount rate. Moreover, it can be redeemed at face value. The promissory notes are suitable for a short term business need.
- Suitable for short-term business plans
- Issued by higher credit rating firms
- Involves less or no risk
- Unsecured instrument
- Comes with a fixed maturity period
3. Certificate of Deposit (CD)
Issued by banks and several other financial organizations, the certificate of deposit is an asset that provides a fixed rate of interest on the amount invested. It is similar to a fixed deposit, the primary difference only being in the principal amount. CD requires a large of money to be issued, for instance, one lakh. Also, the investor is not allowed to withdraw it until maturity.
- Fixed-rate of interest
- Issued for a larger amount
- Maturity rate may vary depending on the financial institute
4. Purchase Agreement (Repos)
It is a formal agreement between RBI and banks under which the money is being lent. It is also known as repos or buybacks in which a party sells its share with a promise to buy it back, thus making it a sell-buy transaction.
- It is bought at the repo rate
- Short-term investment
- Lower rate benefit
Money market funds are one of the greatest instruments for short-term income. All that an investor requires is a well-maintained and diversified portfolio of the money market. The option to invest in the short-term stretch makes this instrument even more favourable for those with lower-risk bearing capacities. Also, the utility of the money market is not merely limited as lucrative investment options but they play various functions in the modern economy. It helps with high liquidity solutions of investment, trading finance, industrial finance needs, as well as ensures self-sufficiency of banks and other financial institutes. The maintenance of the money supply from the Reserve Bank is also regulated by the help of money market funds.