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Basics of money markets and their instruments

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A money market – true to its name – is a financial marketplace that provides a relatively safe investment environment for people with money, while catering to financial demands of borrowers at a lower cost. The key benefit of parking funds in the money market is that the instruments are highly liquid and short-term, and only select types of markets have survived an economic turbulence.

Investment Options

There are several money market instruments (MMIs) in which funds can be invested, typically for short time frames, ranging from a single day to a year.

Common instruments include, but aren’t limited to:

Money market instruments vary across countries and cater to large and retail investors and borrowers.

It is important to note that each of these instruments is evaluated on different parameters. In case of investing in bank deposits, it is the reputation of the organization that decides the deal. Interbank loans, on the other hand, rely on the capacity of the borrower to repay debts in a timely manner. By virtue of being unsecured, commercial papers are associated with higher risks, and the issuer is assessed based on its creditworthiness to ensure guaranteed repayments. Repos are for serious businesses, while MMMFs trading in other MMIs are open to retailers.

US treasury bills, however, are considered to be safest of all money market instruments, besides being short-term, safe, and protected by laws.

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