Question

Name any two instruments for the money market.

Answer 1

Hint: The money market refers to trading in very short-term debt investment. At the wholesale level, it involves large-scale trade between institutions and traders. At the retail level, it includes money market mutual funds purchased by individual investors and money market accounts opened by bank customers.

Complete answer:
Financial instruments with a short-term maturity of up to 1 year used as instruments for raising capital by the issuer are known as money market instruments. These are debt securities which offer a fixed interest rate and are generally unsecured.. Security is not backed up by collateral, and the risk of non-repayment is theoretically high.

However, money market instruments have a high credit rating that ensures that issuers do not default, making them a way forward for investors looking for options to park their money for the short term and earn fixed returns on the same basis.

Features:
- High Liquidity
- Secure investment
- Fixed returns

Purpose:
- Maintains Liquidity in the Market
- Provides Funds at a Short Notice
- Utilisation of Surplus Funds
- Aids in Financial Mobility
- Helps in monetary policy

Types:
Treasury Bills(T-Bills):
Treasury bills or T-Bills are issued by the Reserve Bank of India on behalf of the Central Government for the purpose of raising money. They have a short-term maturity of up to one year. Currently, T-Bills are issued with three different maturities, i.e. 91 days T-Bills, 182 days T-Bills, 1 year T-Bills.

T-Bills are issued at a discount on the face value. The investor will get the face value at maturity. This difference between the initial value and the nominal value is the return earned by the investor. They are the safest short-term fixed income investments supported by the Government of India.

Commercial Papers:
Large companies and businesses issue promising notes to raise capital to meet short-term business needs, known as Commercial Papers (CPs). These firms have a high credit rating, due to which commercial papers are unsecured, with the credibility of the company acting as security for the financial instrument.

Corporates, primary dealers (PDs) and All-India Financial Institutions (FIs) may issue CPs.

CPs have a fixed maturity of between 7 days and 270 days. However, investors can trade this instrument on the secondary market. They offer relatively higher returns compared to treasury bills.

Note:The classic way to mitigate market risk on investment in money market instruments is to hold them to maturity and not to make a panic sale on the secondary market. One can also consider rebalancing their portfolios by selling securities when they become short-term and replacing them with long-term securities to mitigate portfolio risk.