Advantages and disadvantages of money market instrument

Find out the best advantages and disadvantages in money market India.

1. Advantages and disadvantages of money market instrument

2. Money market is a financial market that allows individual and institutional investors a platform to make highly liquid investments. Thus making available to a broad range of investors and borrowers a good opportunity to buy and sell various forms of short-term securities. Being really short-term and with maturities ranging from one day to one year, these securities are highly liquid. Now when one says “money market”, it doesn’t really mean that there’s a physical market, instead it is an informal network of banks and traders linked via phones, fax machines and computers. The general objective of this market is to ensure that short term financial goals can be covered and one can gain greater benefits from cash surpluses, instead of leaving them idle. Therefore, a money market is an apt place for companies looking at investing temporary cash surplus for a short-term and companies facing temporary cash shortfalls can sell securities or borrow funds on a short-term basis.

3. There are several instruments of money market that one can opt to invest in like, Treasury Bills, Certificates of Deposits, Repurchase Agreements, Commercial Papers and Banker’s Acceptance to name a few. Now, as compared to stocks or corporate debt issues, the risk to principal is certainly low, but that is just one benefit. There are several other reasons that show both the pros and cons of investing in money market instruments. Some of them are as follows:   Advantages of Money Market Instruments

4. Safe to Park Funds The stock markets are generally in a continuous flux, and when the investors are not sure of where to park their money, money market instruments can be a safe place to do so.

5. Higher return on investments Money market funds typically pay slightly higher interest rates than traditional savings and current accounts. Sometimes the money market generates single digit returns, which in a down market can be quite attractive.

6. Tax- Free The tax free money market funds can also offer an additional boost for those in the higher tax brackets and avoid generating further taxable income.

7. Liquidity Money market investments are the closest to cash in hand and hence can be regarded as the most liquid form of investment. The investors can buy into them and sell them with comparative ease .

8. Less or No Fee There’s little or no fee or sales charges associated with these funds, also since these can be sold or bought at any time, quite like how money can be deposited and withdrawn from the bank . Disadvantages of Money Market Instruments Purchasing power can get impacted If the return is decent but the inflation is just a percent higher, the investor will be losing on the purchasing power each year. Gradually the money they earn may not help them to cope with the rising cost of living, hence making them poorer.

9. Some returns can vary and can be riskier While money market funds are generally safe and invest only in government securities, however, sometimes to yield better returns they might take some risk. So to earn a greater return percentage, they might invest the money in bonds or commercial papers that carry additional risks, which might not be a smarter idea.

10. Opportunity Cost By investing in money market funds that yields only 2-3%, the investor might be missing out on the opportunity for better rate of return, which can impact the wealth building ability tremendously.

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