Money Market Instruments and their Benefits and Advantages
This is used by institutional investors (companies and organisations) and individuals who wish to make highly liquid investments. The general objective of using a money market instrument is to ensure that short term financial goals can be covered. It is a way of gaining greater benefits from cash surpluses, without leaving them idle in some account or safe.
There are a number of short term financial vehicles which make up the money market. This makes current knowledge and research of money markets very important. Certified Financial Planners (CFPs) like some of the Partners at StoneHouse Capital make it their business to be on top of the most current money market developments. In making use of the money market investment, this research often relies on specialised information from rating agencies like Standard & Poor’s.
The Most Common Money Market Instruments
This is a segment of the fixed income market. It provides a return in the form of fixed payments at set periods. Different money market securities are issued by different sources:
o Money market deposit or Money Market Deposit Account (MMDA) bears the closest resemblance to a savings account. MMDAs offer competitive rates of interest in exchange for above normal deposits.
o Certificates of Deposit or CDs are offered by financial institutions to clients as fixed term deposits at agreed rates of return.
o Treasury bills or T-Bills are short term securities issued by governments.
o Commercial paper is used most often by large corporations because going to a bank can be too laborious when there is a need for cash.
o Banker’s acceptances (BA) are short term credit investments created by non-financial firms and guaranteed by a bank. It is a negotiable type of time draft frequently used in financing international trade transactions.
o A Repo or repurchase agreement is a form of borrowing. A dealer, or holder of a government security, sells it under the terms and conditions of repurchase at an agreed price and date.
o In Reverse Repos the process is reversed to that of a repo – the dealer buys securities from an investor and then sells them back at a higher price on a later date.
o Eurodollars are U.S. Dollar denominated deposits with banks outside the USA. Only very large institutions can make use of it because it requires a very large deposit (in the millions).
o These Funds are portfolios comprised of securities representing high-quality, liquid debt and monetary instruments. They are offered by mutual funds, financial institutions and brokerages. It is one of the easiest ways for individuals to gain access to the it, and covering the need for short term options in a diversified investment portfolio.
Advantages of This Investments
It shares many features with banking facilities such as current accounts, bank cards, and debit orders.
Accessibility
A investment like this culminates in the return of the principal amount at maturity. This period can be set between one day and thirteen months, which makes them more accessible.
Risks
The money markets are in continuous flux. Because risk is lower than investing in stock market shares, it makes use of a money market facility more predictable.
Return on Investment
Better interest rate returns can be obtained than keeping money in a current account. The higher the amount invested, the higher the rate of return.
Withdrawal Facilities
Most of these investments offer the investor some degree of freedom to make withdrawals. Quite often the investor can make between two and five withdrawals during the period of the investment, depending on the length of maturity period.
Liquidity
Liquidity is the ease with which an investment can be converted into cash. As such, a money market investment is the closest thing to cash on hand. It can therefore be regarded as the most liquid form of investment. Liquidity would depend on the terms of the investment, e.g. the maturity period and restrictions on withdrawals.