Money Market Mutual Funds (MMMFs)
Investing in Stock Market Notes
Table of Contents
The money market is not a well-defined place where the business is transacted as in the case of capital markets where all business is transacted at a formal place, i.e. stock exchange. The money market is basically a telephone market and all the transactions are done through oral communication and are subsequently confirmed by written communication and exchange of relative instruments.
According to the RBI, “The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.
From the above definition, it is clear that the money market consist of many sub-market such as the inter-bank call money, bill discounting, treasury bills, Certificate of deposits (CDs), Commercial paper (CPs), Repurchase Options/Ready Forward (REPO or RF), Inter-Bank participation certificates (IBPCs), Securitized Debts, Options, Financial Futures, Forward Rate Agreement (FRAs), etc. which collectively constitute the money market.
Instruments of Money Market
Money market is the short term security market. Following are the instruments dealt in money market.
a) Treasury bills
T-bills short term government security ranging from 14 days to 364 days issued by RBI on behalf of the government to meet its short-term financial needs. No fixed interest in payable on Treasury bills. Normally TBs are issued at the lowest interest rate agreed on competitive bidding. These bills are negotiable instruments and freely transferable.
b) Commercial Paper
Commercial papers are unsecured promissory notes issued by highly creditworthy companies to raise funds for short term. It usually has a maturity period of 15 days to one year. CPs are normally issued at a discount and redeemed at par. The commercial banks and mutual funds are the main investors of commercial papers.
c) Call money and short notice money
Call money refers to money given for a very short period ranging from 1 day to 7 days. Surplus funds of the commercial banks and other institutions are usually given as call money. Banks are the borrowers as well as lenders for the call funds. If the loan is given for one day and can be called back on demand, it is called money at call but if the loan cannot be called back on demand and will require 3 days’ notice, it is called money at short notice. Money at short notice can be of maximum 14 days.
d) Certificate of deposit (CD)
Certificate of deposit is a time deposit having a maturity period from 91 days to 12 months. CDs are issued only by a bank. It is a bearer certificate which is freely transferable and can be sold in secondary market. Banks are not allowed to discount these documents.
e) Commercial bills
These are the trade bills which are drawn at the time of credit sales by the Drawer (Supplier) and accepted by the Drawee (Debtor). It is an acknowledgment of debt normally having a maturity period of 90 days. It is a negotiable instrument and can also be endorsed from one person to another. It can also be discounted with the bank before maturity.
Money Market Mutual Funds (MMMFs)
Money Market Mutual Fund means a scheme of mutual fund which has been set up with the objective of investing exclusively in money market instruments. These instruments include treasury bills, commercial paper, call money and short notice money, certificate of deposit (CD) and Commercial bills. While equities, bonds and debentures dominate the portfolio of capital market mutual funds, the money market constitute the only portfolio of money market mutual funds (MMMFs).
MMMFs mainly invest in money market instruments. These instruments are less risky and period of investment are maximum one year. Investors who want to invest for short term prefers money market mutual funds over capital market mutual funds. But return on money market is less as compared to capital market mutual funds.
History of Money Market Mutual Funds (MMMFs)
Money Market Mutual Funds (MMMFs) were introduced in India in April 1991 to provide an additional short-term avenue to investors and to bring money market instruments within the reach of individuals. In the origin, only commercial banks and public financial institutions were allowed to set up MMMFs. But in November 1995, the Government has permitted private sector mutual funds also to set up Money Market Mutual Funds (MMMFs).