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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