The vast expansion of the global economic sector can largely be accredited to the phenomenon of investments. It is due to the unprecedented development of the capital market that has fuelled the global economic sector by providing support to international trade, business and commerce. However, with capital markets coming to the fore, the incumbent money markets too cannot be neglected. In fact, the money market is just a branch of the capital market. The task of business development is as much a job of the money markets as it is of the capital markets.

Discussing Money Markets:

As mentioned above, the money market is a mere branch of the capital market. Money market refers to the market wherein trading of short-term securities takes place. Money market is basically a short-term market and securities and debt instruments that mature within one year are traded in the money market. Hence, securities like treasury bills, commercial papers, bankers acceptances, certificate of deposits and such other short-term instruments are traded in the money market. The money market is characterized by high liquidity, unlike the capital markets. Here the maximum tenure for any security is one year. Hence, when investors invest in securities like the treasury bills, commercial papers and such other securities it in known as money market investing.

Features of Money Market Investments:

There are certain key features that distinguish the money markets from the capital markets. Some of the major features are as follows:

1) Those investors who do not wish to lock their funds in long-term investments can opt for money market instruments. These instruments have a maximum maturity period of 18 months.

2) Investors can get relatively good returns on their investments within a very short span of time. More importantly they are easily tradable and liquid in nature. Hence, investors can get their money immediately without any prior notice.

3) Investors can purchase money market securities through various agencies like large business corporations, banks, financial institutions and the government.

4) Money market instruments are available usually in the bearer format. Hence, the amount of investments is payable to the individual who carries or possesses the securities.

5) These are completely marketable securities.

6) Investors can keep a track over their securities through the Internet, telephone or the ATM.

Investment Instruments of Money Markets:

There are several instruments or components of the money market. Some of the most important investment instruments in the money market are as follows:

1) Treasury Bills: The treasury bills are considered the safest and most risk-free form of investments. They are similar to zero coupon bonds and do not pay any interest before the bills mature. When the investors sell their treasury bills, they sell it at a discount of the par value. This allows the investors to get better yield to maturity. The maturity period of treasury bills is one year or less than one year. There are bills with varying maturity periods available in the money market. Investors can invest in treasury bills of periods like one month, 91 days, 182 days and one year. Usually, banks are financial institutions mainly purchase treasury bills.

2) Certificate of Deposit: The certificate of deposit is actually a certificate that indicates time deposit made by an investor. This means that the investor deposits his money with a bank or a financial institution for a fixed period of time and he cannot withdraw the money before the tenure is completed. When the investor makes such a deposit he receives a certificate from the bank or the financial institutions that has all the details of the deposit including the time period, the rate of interest and the name of the depositor and his nominees. These deposits have a fixed interest rate for the specific time period and the deposits can range from three months to six months to one year and even for five years. After the end of the tenure, the investor gets his principal amount back with the additional amount as per the interest rate. Investors can have their deposits usually in banks, financial institutions and credit unions.

3) Commercial Paper: Commercial paper is a type of security that is used by large business firms and corporations to raise capital. However, this capital is not necessarily for long-term investments but is mainly used in the form of working capital. These are low-risk investment tools and consequently the returns too are low. The main types of commercial papers are promissory notes, drafts, checks and certificates of deposit.

4) Bankers Acceptance: Bankers acceptance is essentially an order given by a depositor of the bank to pay him a stipulated sum of money at a future date. This order is valid up to a maximum period of six months. At the time of the order, the acceptance works like a postdated check.

Tips for Money Market Investments:

There are certain tips that are aimed to help the investor greatly while investing in the money markets. Some of the most important tips are as follows:

1) One very important factor that investors must keep in mind irrespective of the type of investments is diversifying the investments. It is essential that the investors do not invest more than 5% of their assets in any one form of short-term investments. If investors invest in only one venture then they have a risk of losing large amount of their assets if the bank or the company becomes bankrupt.

2) Investors must refrain from investing in hyped-up investment schemes that promise very high returns.

3) Investors must ensure that they understand the difference between the different interests rates imposed by the banks. The banks charge a nominal rate of interest while giving loans but a higher effective rate of interest on investments. Nominal interest rate is the simple interest while effective rate takes into account compound interest.

4) Investors must check the way in which the interest would be credited. They must check whether the interest is credited every month, every three months or on a yearly basis.

Money market investments are ideal for those investors who prefer immediate access to their money and do not want to lock up their money for a very long duration. Money market investments certainly work for the advantage of the investors.