Money funds provide investors with current income and are managed to maintain a stable share price. Because of their stability, money funds are often used for cash reserves or money that might be needed right away.
Money funds typically invest in short-term, high-quality, fixed-income securities, such as Treasury bills, short-term bank certificates of deposit (CDs), banker's acceptances and commercial paper issued by corporations. The average maturity of a money fund's portfolio must be 90 days or less to help protect against interest rate risk. The income money funds provide is generally determined by short-term interest rates.
What are Money Markets?
Money markets allow banks to manage their liquidity as well as provide the central bank means to conduct monetary policy. Money markets are markets for debt instruments with a maturity
up to one year. The most active parts of the money market are the call money market (i.e. market for overnight and term money between banks and institutions) and the market for repo transactions. The former is in the form of loans and the latter consists of sale and buyback agreements, neither of which are traded.
The main traded instruments are commercial paper (CP), certificates of deposit (CD) and treasury bills (T-bills).
Commercial paper. It is a short-term, unsecured promissory note from a debt issuer to an investor. In India corporations, primary dealers, satellite dealers and financial institutions
can issue these notes.
Generally, companies with very good ratings are active in the CP market, though RBI permits a minimum credit rating of Crisil-P2. Commercial paper matures in between 15 days to one year, though the most popular duration is 90 days. Companies use CP to save interest costs.
Certificate of deposit. These are issued by banks in denominations of Rs.5 lakhs and have maturities ranging from 30 days to 3 years. Banks are allowed to issue CD with a maturity of less than one year while financial institutions issue CD with a maturity of one year or more. Treasury bills. These are instruments issued by RBI at a discount to the face value and form an integral part of the money market. In India, treasury bills are issued in 4 different maturities: 14 days, 90 days, 182 days and 364 days. Certain other short-term instruments are also part of the
money market. These include short-term corporate debentures, bills of exchange and promissory notes.
