FLUCTUATION OF MONEY MARKET

A Project On Study of Fluctuation of Money Market Under the guidance Of _________________________ Submitted by

Priyanka Sawant Roll No.30

__________________________

in partial fulfillment o f the requirement for the award of the degree Of MASTER OF BUSINESS ADMINISTRATION in Finance.

FLUCTUATION OF MONEY MARKET

Acknowledgement
Firstly I would like to thank NDPL for giving the opportunity to complete my project in the organization. I put on record my sincere thanks to Mahender sir for his suggestions and advice. I am extremely grateful to Mamta madam for the encouragement, discussions and critical assessment of the project. It was a good experience for me to work with North Delhi Power Limited, a pioneer in the field of power distribution. I am greatly obliged to Ms. Pooja and Mr. Vineet Kumar who have shared their expertise and knowledge with me without which the completion of project would not have been possible

INDEX 1. INTRODUCTION OF MONEY MARKET

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2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

HISTORY PARTICIPANT FLUCTUATION OF MONEY MARKET FUNCTIONS OF MONEY MARKET MONEY MARKET INSTRUMENT DISCOUNT AND ACCRUAL INSTRUMENT INTRODUCTION OF MONEY MARKET MUTUAL FUND PERPOSE OF MONEY MARKET MUTUAL FUND FOR INVESTORS ADVANTAGES OF FLUCTUATION IN MONEY MARKET DISADVANTAGES OF FLUCTUATION IN MONEY MARKET HOW TO UNDERSTAND MONEY MARKET FLUCTUATION MARKET FLUCTUATION FRIEND OR ENEMY TIPS ON MAXIMIZING OPPORTUNITIES IN FLUCTUATING MARKET MONEY MARKET FUND CONCLUSION

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INTRODUCTION OF MONEY MARKET

As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter and is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure. The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities.[1] It provides liquidity funding for the global financial system. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. The core of the money market consists of interbank lending--banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

. commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables,
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residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines. In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt.

Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers. Retail and institutional money market funds Banks Central banks Cash management programs Arbitrage ABCP conduits, which seek to buy higher yielding paper, while themselves selling cheaper paper. Merchant Banks

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HISTORY In 1971, Bruce R. Bent and Henry B. R. Brown established the first money market fund in the U.S.[3] It was named The Reserve Fund and was offered to investors who were interested in preserving their cash and earning a small rate of return. Several more funds were shortly set up and the market grew significantly over the next few years. Money market funds in the US created a loophole around Regulation Q,[4] and they can be seen as a substitute for banks. Outside of the U.S., the first money market fund was set up in 1968 and was designed for small investors. The fund was called Conta Garantia and was created by John Oswin Schroy. The fund's investments included low denominations of commercial paper. In the 1990s, bank interest rates in Japan were near zero for an extend period of time. To search for higher yields from these low rates in bank deposits, investors used money market funds for short-term deposits instead. However, several money market funds fell off short of their stable value in 2001 due to the Enron bankruptcy, in which several Japanese funds had invested, and investors fled into government-insured bank accounts. Since then the total value of money markets have remained low.[4] Money market funds in Europe have always had much lower levels of investments capital than in the United States or Japan. Regulations in the EU have always encouraged investors to use banks rather than money market funds for short term deposits.[4] Money market funds seek a stable net asset value, or NAV (which is generally $1.00 in the US); they aim never to lose money. If a fund's NAV drops below $1.00, it is said that the fund "broke the buck". This has rarely happened; however, as of September 16, 2008, two money funds have broken the buck (in the 37-year history of money funds) and from 1971 to September 15, 2008, there was only one failure. It is important to note that, while the funds are managed in a fairly safe manner, there would have been many more failures except that the companies offering the money market funds had, in the past, stepped in when necessary to support the fund and avoid having the funds "break the
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buck". This was done because the expected cost to the business from allowing the fund value to drop -- in lost customers and reputation -- was greater than the amount needed to bail it out.[5] The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was the first failure in the then 23-year history of money funds and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an institutional money fund, not a retail money fund, thus individuals were not directly affected. PARTICIPANT Finance companies typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines. In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt: FUNCTIONS OF MONEY MARKET

The money market functions are: [5][6]

Transfer of large sums of money Transfer from parties with surplus funds to parties with a deficit Allow governments to raise funds Help to implement monetary policy Determine short-term interest rates

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FIUCTUATION OF MONEY MARKET The money market can be volatile and unpredictable at times, and even seasoned stock market professionals can be caught off guard by sudden shifts. Individual stocks and entire stock exchanges can gain or lose significant value in short periods in addition to showing long-term trends. Knowing how to understand money market fluctuations can help you to stay ahead of curve in your trading activities. HOW TO UNDERSTAND THE MARKET FLUCTUATION

Step 1 Keep an eye on the macroeconomic environment. Watch for macroeconomic events that can trigger fluctuations in individual sectors or the market as a whole. Watch for increased consumer savings rates due to increased unemployment, for example, which can strangle demand for things like expensive entertainment products, putting many companies' earnings at risk. A credit boom, on the other hand, is likely to give a boost to industries such as construction and automobiles. Step 2 Watch for news stories on individual companies and industries. Expect active traders to react swiftly to news releases. A massive deep-water oil spill, for example, can cause an otherwise strong oil company's stock to take a quick dive, just as the discovery of a new oil deposit can give its stock a boost. The news can also help you to spot new products and industries that threaten established powerhouses. The rise of the cellphone industry, for example, caused traditional telephone companies' stock to fall so steeply that most players either failed or jumped into the cellular space.

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Step 3 Keep an eye on the legal environment. Watch for new laws and regulations, as well as orders from regulatory agencies, that can make or break companies and products. Pharmaceutical companies, for example, experience fluctuations in stock price when the Food and Drug Administration either approves or denies a new drug for sale. Step 4 Understand emotional theory in the stock market. Economics textbooks teach you a wide range of financial decision-making models that apply to stock market investing, all of which rely upon the assumption that all traders act rationally after analyzing all pertinent information. In the real world, however, this is not always the case. Emotional theory asserts that investors do not always act rationally. Traders can unknowingly place more emphasis on recent news than older news, for example, or they can react to quick stock movements without seeking and processing all available information. Step 5 Analyze and compare financial statements. Stock investors use companies' financial statements to assess their strength and performance compared to other players in their industry and the company's own previous data. As an example, analyzing a company's financial statements may reveal that their debt-to-earnings ratio has increased significantly over last year's figure, which can help to explain why the company's stock price fell after the annual report was released, even though top-line earnings increased for the year.

MONEY Stock-market fluctuations a necessary risk If you are saving for retirement and find that you are glued to the radio or TV when the stock market is experiencing wild and volatile movements, you may find yourself asking "why am I taking a risk by investing and not just saving in a bank account or a GIC?"

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It is at times like 2001 and 2009 when we saw huge shifts of capital move from the stock market to the safety of GIC's that cement our understanding that fear of losing far outweighs our desire to gain. The reason we invest is because we know we have to save for retirement and, in many cases, we need a decent return on our savings to achieve our goals. There were times when interest rates were so high that we could easily reach our targets with a GIC or savings account, but the days of double-digit interest rates are far behind us and they may not return for the foreseeable future. Right now, you are lucky to get a savings rate of about 1.65%, and locking your money up for five years in a GIC can get you about 2.5% per year. These historically low rates really hit home when you go on the Bank of Canada website and see that they aim to keep inflation between 1% and 3%. Let's face it, $50,000 a year today is not what it used to be and, in the future, it won't be what it is today. According to the "Rule of 72" a 3% inflation rate means that your costs of living will double every 24 years (72 divided by 3 is 24). With 3% inflation, $50,000 today has the same purchasing power of $25,000 24 years ago and, if you are retiring in 24 years with the same inflation rate, you will need $100,000 per year to generate what $50,000 would buy today. While inflation is relatively low at this time, we are constantly reminded by the Bank of Canada that it will become a significant factor down the road and interest rates will subsequently rise. If your savings target requires a return that is not keeping up with or beating inflation, then you may need to take on more risk and get used to the ups and downs of the stock market.

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Global financial stability is at risk as central banks draw back from ultra-easy policies that have flooded the world with cash, because emerging markets lack defenses to prevent potentially huge capital outflows, top officials were warned yesterday. Central bankers from around the world, devoting the second day at their annual Jackson Hole policy retreat to the threats posed by global liquidity, heard two academic papers on the challenges, sparking a debate on actions and on coordination. Bank of Japan Governor Haruhiko Kuroda (pic) told the audience, which included top officials from advanced as well as emerging economies, that the bold measures he had championed to spur his nation's moribund economy were bearing fruit. "The bank's (policy) has already started to exert its intended effects," Kuroda said. The Bank of Japan has embarked on an aggressive bond-buying campaign to lift inflation in his country to 2%. Easy money policies used to depress interest rates in Japan, Europe and The United States had sparked a flood of capital into emerging markets as investors sought higher returns. Now, however, the US Federal Reserve has said it plans to reduce its bond-buying stimulus by year end, with an eye toward drawing it to a close by mid-2014. Federal Reserve Bank of Atlanta President Dennis Lockhart made clear that tapering could begin next month, provided the economic news between now and then was not dramatically bad.
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"I can get comfortable with September, providing we don't get any really worrisome signals out of the economy between now and the 18th of September," he told Reuters in an interview, referring to the Fed's next meeting, which is on September 17-18. Concerns over Fed tapering has sparked an exodus of cash from emerging markets, including India and Brazil, whose currencies and stock markets suffered steep losses this week. "Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," Jean-Pierre Landau, a former deputy governor of the Bank of France, warned in his presentation. Net positive Turkish Central Bank Governor Erdem Basci attended the conference, but his Brazilian counterpart, Alexandre Tombini, canceled in order to stay home and deal with the crisis. Tombini was replaced in Jackson Hole by his deputy, Luiz Pereira, who argued that a tapering of the Fed's bond purchases might actually be a net benefit for emerging economies if it signaled that the US economy was picking up steam. A stronger United States should spell stronger demand for exports from emerging economies, including Brazil. Landau argued that central banks in advanced economies had cooperated successfully during the 2007-2009 financial crisis, when they coordinated on interest rates cuts and set up currency swap lines. As a result, they could do so again in the future with an eye toward moderating the spillovers from their actions. But, he acknowledged it would be difficult to get agreement to subordinate national priorities in advance, a point echoed by others. "How much should domestic monetary policy restrain itself for the stability of global (conditions)?" asked Allan Meltzer, a Fed historian and professor at Carnegie Mellon University. "That's a fundamental problem for monetary policy." Lockhart said the Fed had a legal obligation to focus on domestic US goals, but allowed that there could be circumstances when the international impact of its actions could be taken into account. "If a policy maker in The United States believed that the global consequences of taking a domestic action would spill back over into the US economy in a very negative way, that clearly is within the scope of consideration," he said in the interview.

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There was also discussion about the need for emerging market nations to develop tools to control credit flows. Without such tools, these countries could lose the ability to control domestic financial conditions with monetary policy. But Terrence Checki of the New York Fed cautioned that monetary policy may not be the best way to deal with financial excesses, and others said domestic priorities should not be subordinated to international obligations. Don Kohn, a former Fed Vice Chairman and a candidate for the top job when Fed Chair Ben Bernanke's term ends in January, countered the claim that monetary policy might be too loose globally, citing elevated jobless rates in rich countries. "One of the ways that monetary policy of the United States was transmitted was by resistance to exchange rate appreciation in other countries," he said, voicing a familiar Fed argument that emerging economies could better absorb easy US policy if they allowed their own exchange rates to fluctuate. - AFP, August 25, 2013.

MONEY MARKET INSTRUMENT

Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift institutions, and credit unions. Repurchase agreements - Short-term loansnormally for less than two weeks and frequently for one dayarranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value. Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States. Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association. Federal funds - (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
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Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months. For the U.S., see Treasury bills. Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future. Short-lived mortgage- and asset-backed securities

Money market fund A money market fund (also known as money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Regulated in the US under the Investment Company Act of 1940, money market funds are important providers of liquidity to financial intermediaries. Explanation Money market funds seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds in the United States are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act restricts the quality, maturity and diversity of investments by money market funds. Under this act, a money fund mainly buys the highest rated debt, which matures in under 13 months. The portfolio must maintain a weighted average maturity (WAM) of 60 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements.[2] Unlike most other financial instruments, money market funds seek to maintain a stable value of $1 per share. Funds are able to pay dividends to investors.[2] Securities in which money markets may invest include commercial paper, repurchase agreements, short-term bonds and other money funds. Money market securities must be highly liquid and of the highest quality. History In 1971, Bruce R. Bent and Henry B. R. Brown established the first money market fund in the U.S.[3] It was named The Reserve Fund and was offered to investors who were interested in preserving their cash and earning a small rate of return. Several more funds were shortly set up and the market grew significantly over the next few years.
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Money market funds in the US created a loophole around Regulation Q,[4] and they can be seen as a substitute for banks. Outside of the U.S., the first money market fund was set up in 1968 and was designed for small investors. The fund was called Conta Garantia and was created by John Oswin Schroy. The fund's investments included low denominations of commercial paper. In the 1990s, bank interest rates in Japan were near zero for an extend period of time. To search for higher yields from these low rates in bank deposits, investors used money market funds for short-term deposits instead. However, several money market funds fell off short of their stable value in 2001 due to the Enron bankruptcy, in which several Japanese funds had invested, and investors fled into government-insured bank accounts. Since then the total value of money markets have remained low.[4] Money market funds in Europe have always had much lower levels of investments capital than in the United States or Japan. Regulations in the EU have always encouraged investors to use banks rather than money market funds for short term deposits.[4] [edit] Breaking the buck Money market funds seek a stable net asset value, or NAV (which is generally $1.00 in the US); they aim never to lose money. If a fund's NAV drops below $1.00, it is said that the fund "broke the buck". This has rarely happened; however, as of September 16, 2008, two money funds have broken the buck (in the 37-year history of money funds) and from 1971 to September 15, 2008, there was only one failure. It is important to note that, while the funds are managed in a fairly safe manner, there would have been many more failures except that the companies offering the money market funds had, in the past, stepped in when necessary to support the fund and avoid having the funds "break the buck". This was done because the expected cost to the business from allowing the fund value to drop -- in lost customers and reputation -- was greater than the amount needed to bail it out.[5] The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was the first failure in the then 23-year history of money funds and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an institutional money fund, not a retail money fund, thus individuals were not directly affected. No further failures occurred until September 2008, a month that saw tumultuous events for money funds. Though, as noted above, other failures were only averted by infusions of capital from the fund sponsors.[6]
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[edit] September 2008 See also: Financial crisis of 20072010 Money market funds increasingly became important to the wholesale money market leading up to the crisis. Their purchases of asset-backed securities and large-scale funding of foreign bank's short-term US denominated debt put the funds in a pivotal position in the market place.[4] The week of September 15, 2008 to September 19, 2008 was very turbulent for money funds and a key part of financial markets seizing up.[7] [edit] Events On Monday, September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. On Tuesday, September 16, 2008, Reserve Primary Fund, the oldest money fund, broke the buck when its shares fell to 97 cents after writing off debt issued by Lehman Brothers.[8] The resulting investor anxiety almost caused a run on money funds, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions: through Wednesday, September 17, 2008, prime institutional funds saw substantial redemptions.[9][10] Retail funds saw net inflows of $4 billion, for a net capital outflow from all funds of $169 billion to $3.4 trillion (5%).[9] In response, on Friday, September 19, 2008, the U.S. Department of the Treasury announced an optional program to "insure the holdings of any publicly offered eligible money market mutual fundboth retail and institutionalthat pays a fee to participate in the program". The insurance will guarantee that if a covered fund breaks the buck, it will be restored to $1 NAV.[10][11] This program is similar to the FDIC, in that it insures deposit-like holdings and seeks to prevent runs on the bank.[7][12] The guarantee is backed by assets of the Treasury Department's Exchange Stabilization Fund, up to a maximum of $50 billion. It is very important to realize that this program only covers assets invested in funds before September 19, 2008 and those who sold equities, for example, during the recent market crash and parked their assets in money funds, are at risk. The program immediately stabilized the system and stanched the outflows, but drew criticism from banking organizations, including the Independent Community Bankers of America and American Bankers Association, who expected funds to drain out of bank deposits and into newly insured money funds, as these latter would combine higher yields with insurance.[7][12] [edit] Analysis The crisis almost developed into a run on the shadow banking system: the redemptions caused a drop in demand for commercial paper,[7] preventing companies from rolling over their short-term debt, potentially causing an acute liquidity crisis: if companies cannot issue new debt to repay maturing debt, and do not have cash on hand to pay it back, they will default on their obligations, and may have to file for bankruptcy. Thus there was concern that the run could
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cause extensive bankruptcies, a debt deflation spiral, and serious damage to the real economy, as in the Great Depression.[citation needed] The drop in demand resulted in a "buyers strike", as money funds could not (because of redemptions) or would not (because of fear of redemptions) buy commercial paper, driving yields up dramatically: from around 2% the previous week to 8%,[7] and funds put their money in Treasuries, driving their yields close to 0%. This is a bank run in the sense that there is a mismatch in maturities, and thus a money fund is a "virtual bank": the assets of money funds, while short term, nonetheless typically have maturities of several months, while investors can request redemption at any time, without waiting for obligations to come due. Thus if there is a sudden demand for redemptions, the assets may be liquidated in a fire sale, depressing their sale price. An earlier crisis occurred in 20072008, where the demand for asset-backed commercial paper dropped, causing the collapse of some structured investment vehicles. [edit] Statistics The Investment Company Institute reports statistics on money funds weekly as part of its Mutual Fund Statistics, as part of its industry statistics, including total assets and net flows, both for institutional and retail funds. It also provides annual reports in the ICI Fact Book. As of December 11, 2008, almost 2,000 money funds are in operation,[citation needed] with total assets of nearly US$3.8 trillion.[13] Of this $3.8 trillion, retail money market funds had $1.282 trillion in Assets Under Management (AUM), of which 77% was in tax-exempt funds. Institutional funds had $2.5 trillion under management of which the overwhelming majority 93% - was tax-exempt.[14] iMoneyNet is the leading provider of money fund statistics. iMoneyNet has been collecting money fund data since the early 1970's. [edit] Types of money funds [edit] Institutional money fund Institutional money funds are high minimum investment, low expense share classes which are marketed to corporations, governments, or fiduciaries. They are often set up so that money is swept to them overnight from a company's main operating accounts. Large national chains often have many accounts with banks all across the country, but electronically pull a majority of funds on deposit with them to a concentrated money market fund. The largest institutional money fund is the JPMorgan Prime Money Market Fund, with over US$100 billion in assets. Among the largest companies offering institutional money funds are
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BlackRock, Western Asset, Federated, Bank of America, Dreyfus, AIM and Evergreen (Wachovia). Retail money fund Retail money funds are offered primarily to individuals. Retail money market funds hold roughly 33% of all money market fund assets. Retail money funds come in a few different breeds: government-only funds, non-government funds and tax-free funds. Yields are typically somewhat higher than in savings accounts.[citation needed] Investors will obtain a slightly higher yield in the non-government variety, whose principal holdings are high-quality commercial paper and other instruments; of course, such funds may get in trouble if fears emerge about previously well-regarded companies. Instruments of the United States Government (and funds holding them) are usually exempt from state income taxes, and conversely, "muni bond funds" are generally exempt from federal income tax. In both cases, yields are (almost always) lower, but may result in better conservation of value depending an individual investors' tax situation. The largest money market mutual fund is Fidelity Investments' Cash Reserves (Nasdaq:FDRXX), with assets exceeding US$110 billion. The largest retail money fund providers include: Fidelity, Vanguard (Nasdaq:VMMXX), and Schwab (Nasdaq:SWVXX). [edit] Similar investments [edit] Money market accounts Main article: Money market account Banks in the United States offer savings and money market deposit accounts, but these shouldn't be confused with money mutual funds. These bank accounts offer higher yields than traditional passbook savings accounts, but often with higher minimum balance requirements and limited transactions. A money market account may refer to a money market mutual fund, a bank money market deposit account (MMDA) or a brokerage sweep free credit balance. [edit] Ultrashort bond funds Main article: Ultrashort bond funds Ultrashort bond funds are mutual funds, similar to money market funds, that, as the name implies, invest in bonds with extremely short maturities. Unlike money market funds, however, there are no restrictions on the quality of the investments they hold. Instead, ultrashort bond funds typically invest in riskier securities in order to increase their return. Since these high-risk securities can experience large swings in price or even default, ultrashort bond funds, unlike money market funds, do not seek to maintain a stable $1.00 NAV and may lose money or dip below the $1.00 mark in the short term.[15] Finally, because they invest in lower quality
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securities, ultrashort bond funds are more susceptible to adverse market conditions such as those brought on by the Financial crisis of 20072010. Enhanced cash funds Enhanced cash funds are bond funds similar to money market funds, in that they aim to provide liquidity and principal preservation, but which:[16]

invest in a wider variety of assets, and do not meet the restrictions of SEC Rule 2a-7; aim for higher returns; have less liquidity; do not aim as strongly for stable NAV.

Enhanced cash funds will typically invest some of their portfolio in the same assets as money market funds, but others in riskier, higher yielding, less liquid assets such as:[16]

lower -rated bonds; longer maturity; foreign currency denominated debt; asset-backed commercial paper (ABCP);[17] Mortgage-backed securities (MBSs);[18] Structured investment vehicles (SIVs).

In general, the NAV will stay close to $1, but is expected to fluctuate above and below, and will break the buck more often.[17][18][19] Different managers place different emphases on risk versus return in enhanced cash some consider preservation of principal as paramount,[17] and thus take few risks, while others see these as more bond-like, and an opportunity to increase yield without necessarily preserving principal. These are typically available only to institutional investors, not retail investors. The purpose of enhanced cash funds is not to replace money markets, but to fit in the continuum between cash and bonds to provide a higher yielding investment for more permanent cash. That is, within one's asset allocation, one has a continuum between cash and long-term investments:

cash most liquid and least risky, but low yielding; money markets / cash equivalents; enhanced cash;

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long-term bonds and other non-cash long-term investments least liquid and most risky, but highest yielding.

Enhanced cash funds were developed due to low spreads in traditional cash equivalents.[17] There are also funds which are billed as "money market funds", but are not 2a-7 funds (do not meet the requirements of the rule).[16] In addition to 2a-7 eligible securities, these funds invest in Eurodollars and repos (repurchase agreements), which are similarly liquid and stable to 2a-7 eligible securities, but are not allowed under the regulations. iMoneyNet provides detailed information on more than 200 enhanced type products with it's quarterly Enhanced Cash Report.

Discount and accrual instruments

There are two types of instruments in the fixed income market that pay the interest at maturity, instead of paying it as coupons. Discount instruments, like repurchase agreements, are issued at a discount of the face value, and their maturity value is the face value. Accrual instruments are issued at the face value and mature at the face value plus interest. [7]

MONEY MARKET MUTUAL FUND

Beginning Investor, Government Bond, Money Market, Mutual Funds, T-bills Investors interested in the money market can access it most easily through money market mutual funds, but these vehicles do not let smaller investors off the hook when it comes to having a rudimentary understanding of the Treasury bills, commercial paper, bankers acceptances,

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repurchase agreements and certificates of deposit(CDs) that make up the bulk of money market mutual fund portfolios.

Purpose of Money Market Mutual Funds for Investors There are three instances when money market mutual funds, because of their liquidity, are particularly suitable investments.
1. Money market mutual funds offer a convenient parking place for cash reserves when an

investor is not quite ready to make an investment or is anticipating a near-term cash outlay for a non-investment purpose. Money market mutual funds offer ultimate safety and liquidity. This means that investors will have an expected sum of cash at the very moment that they need it. (For more on this, read Get A Short-Term Advantage In The Money Market.) 2. An investor holding a basket of mutual funds from a single fund company may occasionally want to transfer assets from one fund to another. If, however, the investor wants to sell a fund before deciding on another fund to purchase, a money market mutual fund offered by the same fund company may be a good place to park the proceeds of sale. Then, at the appropriate time, the investor may exchange his or her money market mutual fund holdings for shares of the other funds in the fund family. 3. To benefit their clients, brokerage firms regularly use money market mutual funds to provide cash management services. Putting a client's dormant cash into money market mutual funds will earn the client an extra percentage point (or two) in annual returns above those earned by other possible investments. (To read more about the money market, check out The Money Market tutorial.) ADVANTAGES

Advantage 1 -- Higher Rate of Interest Money market accounts pay higher interest rates than other types of bank accounts, including passbook savings accounts and regular savings accounts, provided they maintain the minimum
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balance. The interest rate is tiered, compounded and credited monthly so that a money market account accrues more profit as the account balance increases. Advantage 2 - Low Risk The independent Federal Deposit Insurance Corp. insures money market accounts up to the $250,000 limit per account, making them low-risk and safe investments. This makes the account popular with investors as it protects them against loss of deposit. Advantage 3 - Easy Access Account holders can easily access their money market accounts through ATMs, transfers and checks. Banks, however, put a limit on the number of transactions and transfers per month.

Disadvantage 1 -- High Balance Requirement Financial institutions require account holders to maintain a minimum balance in their money market accounts. Bank of America, for example, requires a minimum balance of $2,500 in all its money market accounts. Commerce Banks Premium Money Market Account specifies an average daily balance of $5,000. Accounts that do not maintain this minimum are fined.
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Disadvantage 2 - Limited Number of Withdrawals and Transfers Most money market accounts allow only a limited number of monthly withdrawals and transfers as per federal banking regulations. For example, the National Alliance Bank permits no more than six withdrawals per statement cycle. Commerce Banks Premium Money Market Account allows up to six transfers or withdrawals per month. This poses an inconvenience to a customer who needs to make an emergency withdrawal that will exceed the number of withdrawals permitted. Disadvantage 3 - Interest Rate Fluctuation and Other Fees A variable and fluctuating interest rate applies on a money market account. The interest rate depends on changes in the overall market interest rates. Banks and other depository institutions offering money market accounts establish fees for account maintenance, transactions and other financial services -- which reduce the value of the account.

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Market fluctuations: A friend or an enemy? The stock market has outdone many financial instruments in the recent past due to the high return yielded. The market has grown by nearly 33 percent since June 2012 and has already experienced a growth of around 14 percent for the current year. Further on, it has outdone regional markets such as India, Pakistan, Vietnam, Cambodia, China and Indonesia and also the BRICK markets. Market price earnings ratios are still comparatively lower than our regional counterparts. Thus, we have experienced considerable interest from foreign investors in the recent past. For example, the percentage of foreign activities in the market which was around 10 percent in 2011 and 24 percent in 2012 has already grown above 40 percent during the first five months of 2013. The Colombo Stock Exchange (CSE) has indeed proved to be a lucrative investment opportunity. A point noteworthy is that the growth experienced was not achieved overnight projecting signals of stability in the market. This could be further justified with the S&P SL 20 (an index that monitors the performance of some of the fundamentally strong stocks) growing faster than the All Share Price Index (ASPI) during the current year. The market sentiments are geared at longterm investment which is conducive for further growth in the market. However, when analyzing the movements of the ASPI (Table 1) it is evident that even though it has grown in the long run, it was subjected to short-term fluctuations. It is a normal phenomenon in a market. One should not enter the market with a mind frame that the market will continue to grow. The price of a stock is a manifestation of the demand and supply for a stock. For an example when the demand exceeds the supply prices increase. The demand and supply of stocks are driven by market sentiments. There is a possibility of market sentiments changing. It cannot be forecasted with certainty that the market will continue to grow in the short run given the fact that it went up in the recent past. As long as one has invested in fundamentally strong stocks that are not over valued in price and he enters the market with a long-term horizon, he should not be alarmed of such fluctuations. Further on, these fluctuations could be identified as stock market corrections. Even though it would seem painful in the short run, it is actually healthy because there is always excess speculation developed during the bull market and excess speculation is a hindrance towards a stable and growing market. Moreover, short-term fluctuations of this nature spout unlimited opportunities. Once, Warren Buffet, one of the most successful investors, stated, Look at market fluctuations as your friend rather than your enemy.

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Tips on maximizing opportunities in fluctuating market Dont panic Douglus Adams The golden rule is not to panic and make rash decisions when there is a downward trend in prices. As stated, if one has invested in fundamentally strong stocks that are not over valued in price at the point of purchase and he enters the market with a long-term horizon he should not be alarmed of such fluctuations. Do your own research on the reasons for the downward trend. Dont base your decisions on rumors. If you get alarmed and start selling your shares for no valid reason others will follow you and the market will go down further and increase the possibility of incurring more losses in the market. Bear in mind that a market is the combined behaviour of thousands of people responding to information and market signals. Be a responsible investor and refrain from sending wrong market signals through your transactions. I buy on the assumption that they will close the market the next day and open in five years. Only buy something that youd be perfectly happy to hold if the market shut down for ten years Warren Buffett The driving force behind investors behaving negatively towards short-term dips in the market greatly depends on liquidity concerns of the investor. You should invest money that you will not need in the near future. It is only then that one would be able to maximize the profits in a growing market. Invest a certain percentage of your savings. I will tell you how to become rich. Close the doors. Be greedy when others are fearful Warren Buffett Investors usually invest when a market is going up. Differently stated at a point that demand and thereby prices are going up. When there is a down trend in the short run, investors could buy shares at a lower price than before. Hence, the average cost of the stock would go down and increase profits. For an example, if A buys 100 shares at the average market price of Rs.10 and the market witnesses a short-term dip in the market and the price goes down to Rs.5, he could purchase another 100 shares at the given price. The average price goes down to Rs.7.50.
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Dont invest all the money at once. Purchase within a certain time span and under different market conditions to maximize the opportunities in a growing market. Whether were talking about socks or stocks, I like buying quality merchandise when it is marked down Warren Buffet It is advised to invest in fundamentally strong stocks that are not overvalued and not in stocks that witness an upward movement in prices during a short time period for no valid reason. Experience form our stock market reveals that fundamentally strong stocks go down slower than the others when the market is experiencing a dip in the short run. Similarly, such stocks would regain the demand and thereby the price faster than other stocks. There is a book value for a stock based on the performance of the company. Even if the price decreases in the short run, it has to reach its book value before long. Remember that credit is money Benjamin Franklin Refrain from excessive trading from margin trading accounts. The rationale behind margin trading is to purchase on credit and pay an interest on the principal amount until the stocks are sold at a higher price and the money is repaid. This process is successful in a bull market. If the trend is reversed and investors fail to pay the interest there will be margin calls. There will be excessive selling that would affect adversely on the market. It could be concluded on the note that the movements of stock prices are subjected to fluctuations. It is an inherent quality in an exchange market where investment decisions are driven by independent individuals. Market fluctuations are market corrections of inappropriate investment decisions. Hence, such fluctuations could be kept under manageable limits provided investors act wisely and patiently. Look at market fluctuations as your friend rather than your enemy.

MONEY MARKET FUND Money market fund A money market fund (also known as money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Regulated in the US under the Investment Company Act of 1940, money market funds are important providers of liquidity to financial intermediaries. Explanation Money market funds seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds in the United States are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act restricts the quality, maturity and diversity of investments by money market funds. Under this act, a money fund mainly buys the highest rated debt, which matures in under 13 months. The portfolio must
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maintain a weighted average maturity (WAM) of 60 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements.[2] Unlike most other financial instruments, money market funds seek to maintain a stable value of $1 per share. Funds are able to pay dividends to investors.[2] Securities in which money markets may invest include commercial paper, repurchase agreements, short-term bonds and other money funds. Money market securities must be highly liquid and of the highest quality. History In 1971, Bruce R. Bent and Henry B. R. Brown established the first money market fund in the U.S.[3] It was named The Reserve Fund and was offered to investors who were interested in preserving their cash and earning a small rate of return. Several more funds were shortly set up and the market grew significantly over the next few years. Money market funds in the US created a loophole around Regulation Q,[4] and they can be seen as a substitute for banks. Outside of the U.S., the first money market fund was set up in 1968 and was designed for small investors. The fund was called Conta Garantia and was created by John Oswin Schroy. The fund's investments included low denominations of commercial paper. In the 1990s, bank interest rates in Japan were near zero for an extend period of time. To search for higher yields from these low rates in bank deposits, investors used money market funds for short-term deposits instead. However, several money market funds fell off short of their stable value in 2001 due to the Enron bankruptcy, in which several Japanese funds had invested, and investors fled into government-insured bank accounts. Since then the total value of money markets have remained low.[4] Money market funds in Europe have always had much lower levels of investments capital than in the United States or Japan. Regulations in the EU have always encouraged investors to use banks rather than money market funds for short term deposits.[4] [edit] Breaking the buck Money market funds seek a stable net asset value, or NAV (which is generally $1.00 in the US); they aim never to lose money. If a fund's NAV drops below $1.00, it is said that the fund "broke the buck". This has rarely happened; however, as of September 16, 2008, two money funds have broken the buck (in the 37-year history of money funds) and from 1971 to September 15, 2008, there was only one failure.
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It is important to note that, while the funds are managed in a fairly safe manner, there would have been many more failures except that the companies offering the money market funds had, in the past, stepped in when necessary to support the fund and avoid having the funds "break the buck". This was done because the expected cost to the business from allowing the fund value to drop -- in lost customers and reputation -- was greater than the amount needed to bail it out.[5] The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was the first failure in the then 23-year history of money funds and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an institutional money fund, not a retail money fund, thus individuals were not directly affected. No further failures occurred until September 2008, a month that saw tumultuous events for money funds. Though, as noted above, other failures were only averted by infusions of capital from the fund sponsors.[6] [edit] September 2008 See also: Financial crisis of 20072010 Money market funds increasingly became important to the wholesale money market leading up to the crisis. Their purchases of asset-backed securities and large-scale funding of foreign bank's short-term US denominated debt put the funds in a pivotal position in the market place.[4] The week of September 15, 2008 to September 19, 2008 was very turbulent for money funds and a key part of financial markets seizing up.[7] [edit] Events On Monday, September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. On Tuesday, September 16, 2008, Reserve Primary Fund, the oldest money fund, broke the buck when its shares fell to 97 cents after writing off debt issued by Lehman Brothers.[8] The resulting investor anxiety almost caused a run on money funds, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions: through Wednesday, September 17, 2008, prime institutional funds saw substantial redemptions.[9][10] Retail funds saw net inflows of $4 billion, for a net capital outflow from all funds of $169 billion to $3.4 trillion (5%).[9] In response, on Friday, September 19, 2008, the U.S. Department of the Treasury announced an optional program to "insure the holdings of any publicly offered eligible money market mutual fundboth retail and institutionalthat pays a fee to participate in the program". The insurance will guarantee that if a covered fund breaks the buck, it will be restored to $1 NAV.[10][11] This program is similar to the FDIC, in that it insures deposit-like holdings and seeks to prevent runs on the bank.[7][12] The guarantee is backed by assets of the Treasury Department's Exchange
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Stabilization Fund, up to a maximum of $50 billion. It is very important to realize that this program only covers assets invested in funds before September 19, 2008 and those who sold equities, for example, during the recent market crash and parked their assets in money funds, are at risk. The program immediately stabilized the system and stanched the outflows, but drew criticism from banking organizations, including the Independent Community Bankers of America and American Bankers Association, who expected funds to drain out of bank deposits and into newly insured money funds, as these latter would combine higher yields with insurance.[7][12] [edit] Analysis The crisis almost developed into a run on the shadow banking system: the redemptions caused a drop in demand for commercial paper,[7] preventing companies from rolling over their short-term debt, potentially causing an acute liquidity crisis: if companies cannot issue new debt to repay maturing debt, and do not have cash on hand to pay it back, they will default on their obligations, and may have to file for bankruptcy. Thus there was concern that the run could cause extensive bankruptcies, a debt deflation spiral, and serious damage to the real economy, as in the Great Depression.[citation needed] The drop in demand resulted in a "buyers strike", as money funds could not (because of redemptions) or would not (because of fear of redemptions) buy commercial paper, driving yields up dramatically: from around 2% the previous week to 8%,[7] and funds put their money in Treasuries, driving their yields close to 0%. This is a bank run in the sense that there is a mismatch in maturities, and thus a money fund is a "virtual bank": the assets of money funds, while short term, nonetheless typically have maturities of several months, while investors can request redemption at any time, without waiting for obligations to come due. Thus if there is a sudden demand for redemptions, the assets may be liquidated in a fire sale, depressing their sale price. An earlier crisis occurred in 20072008, where the demand for asset-backed commercial paper dropped, causing the collapse of some structured investment vehicles. [edit] Statistics The Investment Company Institute reports statistics on money funds weekly as part of its Mutual Fund Statistics, as part of its industry statistics, including total assets and net flows, both for institutional and retail funds. It also provides annual reports in the ICI Fact Book. As of December 11, 2008, almost 2,000 money funds are in operation,[citation needed] with total assets of nearly US$3.8 trillion.[13] Of this $3.8 trillion, retail money market funds had $1.282 trillion in Assets Under Management (AUM), of which 77% was in tax-exempt funds. Institutional funds had $2.5 trillion under management of which the overwhelming majority 93% - was tax-exempt.[14]
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iMoneyNet is the leading provider of money fund statistics. iMoneyNet has been collecting money fund data since the early 1970's. [edit] Types of money funds [edit] Institutional money fund Institutional money funds are high minimum investment, low expense share classes which are marketed to corporations, governments, or fiduciaries. They are often set up so that money is swept to them overnight from a company's main operating accounts. Large national chains often have many accounts with banks all across the country, but electronically pull a majority of funds on deposit with them to a concentrated money market fund. The largest institutional money fund is the JPMorgan Prime Money Market Fund, with over US$100 billion in assets. Among the largest companies offering institutional money funds are BlackRock, Western Asset, Federated, Bank of America, Dreyfus, AIM and Evergreen (Wachovia). Retail money fund Retail money funds are offered primarily to individuals. Retail money market funds hold roughly 33% of all money market fund assets. Retail money funds come in a few different breeds: government-only funds, non-government funds and tax-free funds. Yields are typically somewhat higher than in savings accounts.[citation needed] Investors will obtain a slightly higher yield in the non-government variety, whose principal holdings are high-quality commercial paper and other instruments; of course, such funds may get in trouble if fears emerge about previously well-regarded companies. Instruments of the United States Government (and funds holding them) are usually exempt from state income taxes, and conversely, "muni bond funds" are generally exempt from federal income tax. In both cases, yields are (almost always) lower, but may result in better conservation of value depending an individual investors' tax situation. The largest money market mutual fund is Fidelity Investments' Cash Reserves (Nasdaq:FDRXX), with assets exceeding US$110 billion. The largest retail money fund providers include: Fidelity, Vanguard (Nasdaq:VMMXX), and Schwab (Nasdaq:SWVXX). [edit] Similar investments [edit] Money market accounts Main article: Money market account Banks in the United States offer savings and money market deposit accounts, but these shouldn't be confused with money mutual funds. These bank accounts offer higher yields than traditional
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passbook savings accounts, but often with higher minimum balance requirements and limited transactions. A money market account may refer to a money market mutual fund, a bank money market deposit account (MMDA) or a brokerage sweep free credit balance. [edit] Ultrashort bond funds Main article: Ultrashort bond funds Ultrashort bond funds are mutual funds, similar to money market funds, that, as the name implies, invest in bonds with extremely short maturities. Unlike money market funds, however, there are no restrictions on the quality of the investments they hold. Instead, ultrashort bond funds typically invest in riskier securities in order to increase their return. Since these high-risk securities can experience large swings in price or even default, ultrashort bond funds, unlike money market funds, do not seek to maintain a stable $1.00 NAV and may lose money or dip below the $1.00 mark in the short term.[15] Finally, because they invest in lower quality securities, ultrashort bond funds are more susceptible to adverse market conditions such as those brought on by the Financial crisis of 20072010. Enhanced cash funds Enhanced cash funds are bond funds similar to money market funds, in that they aim to provide liquidity and principal preservation, but which:[16]

invest in a wider variety of assets, and do not meet the restrictions of SEC Rule 2a-7; aim for higher returns; have less liquidity; do not aim as strongly for stable NAV.

Enhanced cash funds will typically invest some of their portfolio in the same assets as money market funds, but others in riskier, higher yielding, less liquid assets such as:[16]

lower -rated bonds; longer maturity; foreign currency denominated debt; asset-backed commercial paper (ABCP);[17] Mortgage-backed securities (MBSs);[18] Structured investment vehicles (SIVs).

In general, the NAV will stay close to $1, but is expected to fluctuate above and below, and will break the buck more often.[17][18][19] Different managers place different emphases on risk versus return in enhanced cash some consider preservation of principal as paramount,[17] and thus take few risks, while others see these as more bond-like, and an opportunity to increase yield without
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necessarily preserving principal. These are typically available only to institutional investors, not retail investors. The purpose of enhanced cash funds is not to replace money markets, but to fit in the continuum between cash and bonds to provide a higher yielding investment for more permanent cash. That is, within one's asset allocation, one has a continuum between cash and long-term investments:

cash most liquid and least risky, but low yielding; money markets / cash equivalents; enhanced cash; long-term bonds and other non-cash long-term investments least liquid and most risky, but highest yielding.

Enhanced cash funds were developed due to low spreads in traditional cash equivalents.[17] There are also funds which are billed as "money market funds", but are not 2a-7 funds (do not meet the requirements of the rule).[16] In addition to 2a-7 eligible securities, these funds invest in Eurodollars and repos (repurchase agreements), which are similarly liquid and stable to 2a-7 eligible securities, but are not allowed under the regulations. iMoneyNet provides detailed information on more than 200 enhanced type products with it's quarterly Enhanced Cash Report.

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Conclusion

The money market specializes in debt securities that mature in less than one year. Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities. The easiest way for individuals to gain access to the money market is through a money market mutual fund. T-bills are short-term government securities that mature in one year or less from their issue date. T-bills are considered to be one of the safest investments - they don't provide a great return. A certificate of deposit (CD) is a time deposit with a bank. Annual percentage yield (APY) takes into account compound interest, annual percentage rate(APR) does not. CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD. Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than T-bills because of the higher default risk. Banker's acceptances (BA)are negotiable time draft for financing transactions in goods.

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