The fixed income market has two parts: the money market and the bond market. Debt products with terms of three months or less (less than a year) mostly make up the money market. You’ve taken part in the money market if you’ve ever made a fixed deposit (also called a “CD”) with a bank or another financial institution. When they need cash quickly, governments, institutions, and businesses all go to the money market. In this post, we’ll examine the characteristics of money market and grab extensive knowledge on the topics.
Furthermore, lenders provide short-term loans through this market that businesses can use to fund their working capital and circulating capital. The term “money market” refers to all of the businesses and financial institutions that trade in different grades of “money market.”
Financial institutions mostly give out money market instruments to help corporations, government agencies, and other financial institutions meet their short-term funding needs. The next three months will see almost all of these securities being paid off. In the next twelve months, only a few of them will be paid off.
Characteristics of Money Market
The central bank is in charge of making sure that the whole money market runs smoothly. Commercial banks and other institutions rely on the central bank’s ability to rediscount and borrow more during the busy season. This is more true than ever when there is a lot going on. In addition, the CB does random checks on how these institutions lend money. To learn more, take a look at these characteristics of money market. Read on disadvantages of money market to learn the whole story.
Unregulated Sector
Thirdly, people in charge of money do not check the shadow banking system. The reason for this is that there is no way to keep an eye on the unregulated part of the money market. Because the unorganized money market is mostly out of the RBI’s control, it limits the RBI’s ability to be flexible with money and control it to some degree.
Efficient Banking System
The Commercial Banks are the market as a whole’s brains and nerves. They are a very important part of getting short-term loans. The Central Bank and the different parts of the money market can’t work without commercial banks.
Conversion of Cash
Businesses can use money market funds as a cash management tool to hold their short-term cash reserves, which is an important characteristic of the money market.
Additionally, a busy secondary market where these instruments can be bought and sold must exist. Another characteristics of money market is that money market mutual funds are often used as a cash management tool for individuals and businesses.
Role of Market
A central bank, commercial banks, non-bank financial institutions, discount and acceptance houses, and non-bank financial intermediaries are all parts of the money market. In this market, commercial banks often have the most power. Factors such as inflation, economic growth, and central bank policies influence money market rates, which is an important characteristics of the money market.
Scattered
The country’s financial market being spread out over a large area is the second problem. Kolkata or Mumbai are both places in India where a lot of money is made and spent.
The name “National Money Market” comes from the fact that these two markets have merged into one. But Delhi and Ahmedabad are getting closer and closer to being part of the National Money Market. There is a link between the national money market and the local money market.
Sub-Markets
It’s not possible to put this market into a single category. There are many different parts to it, and each one serves a different kind of financing. On the Call Money Market, the Acceptance Market, and the Bill Market, you can see this in action. There is a lot of liquidity in money market securities.
Dichotomous
One can think of the Indian monetary system as having two parts: the organized, or “commercial,” banking sector built using Western or European models of finance, and the unorganized, or “shadow,” banking sector that uses more traditional models of finance. But there isn’t much of a link between these two topics of interest.
Every part of the economy has its own quirks and, as a result, its own ways of doing business on a daily basis. The regulated part of India’s money market has gained ground over the unregulated part over the course of several decades. But it is by no means a small player when it comes to giving money to rural communities.
No Formal Place
Most business deals happen over the phone, where talking is the most common way to talk. After that, traders can trade relevant written materials. The stock exchange is the most formal place where most business is done in a capital market.
Wholesale Market
It’s a wholesale market, so a huge amount of cash and other forms of capital change hands every day. Because the regulatory environment has become more flexible, there is always a push to make new instruments.
Short-Term Funds
The market uses the term “near money” to refer to cash and other liquid assets that can be invested in a short amount of time. In addition, this service only deals with financial assets that are due by the end of the next calendar year. The characteristics of money market work as an important source of liquidity for the financial system, enabling institutions to meet their short-term funding needs.
Demand and Supply of Funds
How many people want and need money Short-term funds should be much harder to get than they are to get. It assumes that there is a lot of business going on at home and abroad.
Investors use the money market to manage short-term cash requirements and earn a return on surplus funds, making it one of the key characteristics of the money market.
Frequently Asked Questions
What’s the Securities Duration in Money Market Mutual Funds?
Industry standards say that money market mutual funds can only buy securities with less than 397 days left until they mature. The fund must put at least 30% of its total assets into Weekly Liquid Assets. Short-term liquid assets include cash, U.S. Treasury bills and other direct obligations of the U.S. government, certain other types of debt issued by U.S. government agencies that are subject to discounts and mature in sixty days or less, and securities that mature or are payable within five business days.
A taxable fund must have at least 10% of its assets in “Daily Liquid Assets,” which include cash and short-term investments. The types of assets that are due or can be paid within one business day include cash, direct obligations of the U.S. government, and securities with the same time frame. If the fund’s overall weighted average maturity is less than 60 days, the remaining assets may be in longer-term issues.
Why can Yields on Money Market Mutual Funds be Very Low?
Mutual funds in the money market are a type of investment that pools money to buy a wide range of short-term, high-quality assets that pay interest. After deducting the costs of running the fund, the fund gives back the remaining net income to investors in the form of distributions of the underlying securities.
Low yields on the securities in which money market mutual funds invest mean that the returns to shareholders are low. Since funds invest in securities with low yields, this is what happens. How the Federal Reserve (the Fed) feels about interest rates has a big effect on the rates on the money market.
Why No Government Insurance for Money Market Mutual Funds?
The government of the United States does not offer insurance for mutual funds. Money market funds are investments with an uncertain value, just like bond and stock mutual funds. Investors must fully understand this idea.
Conclusion
The money market can thrive due to the growing interbank market. Efficient money market encourages growth of non-bank financial intermediaries, making fund access more difficult. Savers can put their money to work in many different ways. Read on to discover everything there is to know about characteristics of money market and to become a subject matter expert on it.