What is Money Market?

Money Market is a financial market where short-term financial assets having

liquidity of one year or less are traded on stock exchanges. The securities or
trading bills are highly liquid. Also, these facilitate the participant’s short-term
borrowing needs through trading bills. The participants in this financial market
are usually banks, large institutional investors, and individual investors. At the
wholesale level, it involves large-volume trades between institutions and
traders. At the retail level, it includes money market mutual funds bought by
individual investors and money market accounts opened by bank customers.
In all of these cases, the money market is characterized by a high degree of
safety and relatively low rates of return.

Objectives of Money Market

. Providing borrowers such as individual investors, government, etc. with short-

term funds at a reasonable price. Lenders will also have the advantage of
liquidity as the securities in the money market are short-term.
. It also enables lenders to turn their idle funds into an effective investment. In
this way, both the lender and borrower are at a benefit.
. RBI regulates the money market. Therefore, in turn, helps to regulate the level
of liquidity in the economy.
. Since most organizations are short on their working capital requirements. The
money market helps such organizations to have the necessary funds to meet
their working capital requirements.
. It is an important source of finance for the government sector for both national
and international trade. And hence, provides an opportunity for the banks to
park their surplus funds.

Importance of the Money Market

The money market is a market for short term transactions. Hence it is
responsible for the liquidity in the market. Following are the reasons why the
money market is essential:

 It maintains a balance between the supply of and demand for the monetary
transactions done in the market within a period of 6 months to one year..
 It enables funds for businesses to grow and hence is responsible for the
growth and development of the economy.
 It aids in the implementation of monetary policies.
 It helps develop trade and industry in the country. Through various money
market instruments, it finances working capital requirements. It helps develop
the trade in and out of the country.
 The short term interest rates influence long term interest rates. The money
market mobilises the resources to the capital markets by way of interest rate
control.
 It helps in the functioning of the banks. It sets the cash reserve ratio
and statutory liquid ratio for the banks. It also engages their surplus funds
towards short term assets to maintain money supply in the market.
Instruments like T-bills, help the government raise short term funds. Otherwise, to
fund projects, the government will have to print more currency or take loans
leading to inflation in the economy. Hence the it is also responsible for controlling
inflation.

Functions of the Money Market

The money market contributes to the economic stability and development of a

country by providing short-term liquidity to governments, commercial banks,
and other large organizations. Investors with excess money that they do not
need can invest it in the money market and earn interest.

Here are the main functions of the money market:

1. Financing Trade

The money market provides financing to local and international traders who
are in urgent need of short-term funds. It provides a facility to discount bills of
exchange, and this provides immediate financing to pay for goods and
services.

International traders benefit from the acceptance houses and discount

markets. The money market also makes funds available for other units of the
economy, such as agriculture and small-scale industries.

2. Central Bank Policies

The central bank is responsible for guiding the monetary policy of a country
and taking measures to ensure a healthy financial system. Through the
money market, the central bank can perform its policy-making function
efficiently.

For example, the short-term interest rates in the money market represent the
prevailing conditions in the banking industry and can guide the central bank in
developing an appropriate interest rate policy. Also, the integrated money
markets help the central bank to influence the sub-markets and implement its
monetary policy objectives.

3. Growth of Industries

The money market provides an easy avenue where businesses can obtain
short-term loans to finance their working capital needs. Due to the large
volume of transactions, businesses may experience cash shortages related to
buying raw materials, paying employees, or meeting other short-term
expenses.

Through commercial paper and finance bills, they can easily borrow money on
a short-term basis. Although money markets do not provide long-term loans, it
influences the capital market and can also help businesses obtain long-term
financing. The capital market benchmarks its interest rates based on the
prevailing interest rate in the money market.

4. Commercial Banks Self-Sufficiency

The money market provides commercial banks with a ready market where
they can invest their excess reserves and earn interest while maintaining
liquidity. Short-term investments, such as bills of exchange, can easily be
converted to cash to support customer withdrawals.

Also, when faced with liquidity problems, they can borrow from the money
market on a short-term basis as an alternative to borrowing from the central
bank. The advantage of this is that the money market may charge lower
interest rates on short-term loans than the central bank typically does.

Money Market vs Stock Market

Particulars Money Market Stock Market
Maturity of the The money market However tradable in the short
instruments instruments carry a term, stocks create wealth
maturity period of less than creation when invested for a
a year. number of years.
Financing These instruments are Used for long-term fund
needs used to fund the short-term requirements.
needs of the borrower.
Types of It has instruments like T- It’s a stock of an independently
instruments bills, certificate of deposits, listed company
inter-bank call money, etc.
Degree of risk Risk is comparatively lower Risk is higher.
due to the short-term
maturity period
What are Money Market Instruments?
Money market instruments are financial instruments that help companies,
corporations, and government bodies to raise short-term debt for their needs.
The borrowers meet their short-term needs at a low cost and the lenders
benefit from interest rates and liquidity. Money market instruments include
bonds, treasury bills, certificates of deposit, commercial paper, etc.

What are the Advantages and Disadvantages of Money Market

Instruments?
Advantages of Investing in Money Market Instruments
Money market instruments offer higher liquidity in comparison to other fixed
income instruments. With no lock-in period, an investor can sell their
investments at any time. Furthermore, the rate of return on a money market
instrument is marginally higher in comparison to interest on savings
accounts.
Disadvantages of Investing in Money Market Instruments
No doubt the interest rate is higher in comparison to savings bank accounts.
However, the rate of interest does not account for the increasing inflation in
the economy. While other investment instruments like mutual funds offer a
higher return on investment over the long term. Hence, if the investment
objective is to seek capital appreciation with inflation-beating returns then
money market instruments are not an ideal choice.
Characteristics of Money Market Instruments

 It is a financial market and has no fixed geographical location.

 It is a market for short term financial needs, for example, working capital
needs.
 It’s primary players are the Reserve Bank of India (RBI), commercial
banks and financial institutions like LIC, etc.,
 The main money market instruments are Treasury bills, commercial
papers, certificate of deposits, and call money.
 It is highly liquid as it has instruments that have a maturity below one
year.
 Most of the money market instruments provide fixed returns.

Types of Money Market Instruments

Money Market Accounts
Money market accounts are a type of savings account. They pay interest, but
some issuers offer account holders limited rights to occasionally withdraw
money or write checks against the account. (Withdrawals are limited by
federal regulations. If they are exceeded, the bank promptly converts it to a
checking account.) Banks typically calculate interest on a money market
account on a daily basis and make a monthly credit to the account.
In general, money market accounts offer slightly higher interest rates than
standard savings accounts. But the difference in rates between savings and
money market accounts has narrowed considerably since the 2008 financial
crisis. Average interest rates for money market accounts vary based on the
amount deposited. As of August 2021, the best-paying money market account
with no minimum deposit offered 0.56% annualized interest.

Money Market Funds

What is a money market fund?
The money market is a segment of the financial market where high-liquidity
financial instruments with short term (6-12 months) maturities are traded. A
money market fund, on the other hand, is a type of mutual fund that invests in
low-risk and short-term debt securities. For this type of fund, maturity is just 6
months to 1 year. It’s considered one of the safest and least risky investment
options available because of its high liquidity.

Is a money market fund the same as a money market account?

money market funds in the philippines - money market fund vs money market
account

Sometimes called a money market deposit account, a money market account

pays interest based on current money market interest rates. Money market
funds, on the other hand, are mutual funds that invest shareholder’s funds in
money market securities.
Is a money market fund the same as a money market account?

Basic Features of Money Market Funds in the Philippines

Initial capital, or the minimum investment to open a money market fund.

Additional investment, or the amount you want to add to your investment that
may range anywhere from PHP 25 PHP to at least PHP 100,000, depending
on your fund.

Sales load, which is charged to you whenever you make an additional

investment.

Trust fee, usually at .05% to 1% to cover operations, management or

administrative expenses.

Holding period, or the period of time you are supposed to keep your
investment in your money market fund.

Exit fee, which is computed when you redeem your investment before the end
of your holdout period.

Who can invest in money market funds?

The ideal investors are those who have a moderate risk appetite and want
low-risk and short-term investments.

If you’re looking for safe and highly liquid investments that offer relatively
higher returns compared to savings accounts or time deposits, this will be a
suitable investment.

How do you subscribe to a money market fund?

There are many banks, UITF, insurance, and mutual fund companies that will
help you invest in money market funds. With this, a professional team of fund
managers will take care of your investment, making well-timed decisions on
your behalf to grow and diversify your investment portfolio.

You can write a check or make an online transfer to buy into money market
funds. As a new investor, there are also forms that you will need to fill out, like
the client suitability assessment form, risk disclosure statement, and UITF
participating trust agreement, just to name a few.

Read more: Unit Investment Trust Fund: What Is UITF and How Do I Invest?

List of Money Market Funds in the Philippines

Here are some companies that offer money market funds which are right for
any budget. These will give you an idea on minimum investments, holding
periods, and fees.

Sun Life Prosperity Money Market Fund

Minimum investment amount: PHP 100

Minimum subsequent: PHP 100

Minimum holding period: 7 days

Fee: 0.15%

Early redemption fee: 0.25%

Launch date: July 1, 2004

(as of September 30, 2020)

Land Bank Money Market Fund

Minimum investment amount: PHP 5,000

Minimum subsequent: PHP 1,000

Minimum holding period: 7 days

Fee: 0.104% p.a.

Early redemption fee: 25% but not less than PHP 500

Launch date: March 27, 2012

China Bank Money Market Fund

Minimum investment amount: PHP 5,000

Minimum subsequent: PHP 1,000

Minimum holding period: 3 days

Fee: 0.25%

Early redemption fee: 1%

Launch date: February 20, 2009

(as of September 30, 2020)

Rizal Peso Money Market Fund

Minimum investment amount: PHP 5,000

Minimum subsequent: PHP 1,000

Minimum holding period: None

Fee: 0.25% p.a.

Early redemption fee: 0.125%

Launch date: March 28, 2005

BPI Invest Money Market Fund

Minimum investment amount: PHP 10,000

Minimum subsequent: PHP 1,000

Minimum holding period: None

Fee: 0.25% p.a.

Early redemption fee: None

Launch date: August 1, 2013

BDO Peso Money Market Fund

Minimum investment amount: PHP 10,000

Minimum subsequent: PHP 10,000

Minimum holding period: None

Fee: 0.50% p.a.

Early redemption fee: None

Launch date: April 1, 2005

(as of September 30, 2020)

Metro Money Market Fund

Minimum investment amount: PHP 10,000

Minimum subsequent: PHP 1,000

Minimum holding period: 7 days

Fee: 0.50% p.a.

Early redemption fee: 50% of income on redeemed amount

Launch date: April 4, 2005

(as of October 30, 2020)

PNB Prime Peso Money Market Fund

Minimum investment amount: PHP 10,000

Minimum subsequent: PHP 2,000

Minimum holding period: 5 days

Fee: 0.50% p.a.

Early Redemption Fee: 50% of income earned

Launch date: September 27, 2010

SB Money Market Fund

Minimum investment amount: PHP 10,000

Minimum subsequent: PHP 5,000

Minimum holding period: None

Fee: 0.35% p.a.

Early Redemption Fee: None

Launch date: October 9, 2006

What are the advantages of money market funds?

Money market funds are good alternatives to a bank savings account. They
keep your money somewhere safe while earning passive income in a short
period of time.

They are less risky for your short-term financial goals because they mature in
just 6 to 12 months. And they are highly liquid, which means you can easily
and quickly convert your investment to cash.

What are the disadvantages of money market funds?

Any investment still carries even a tiny amount of risk. Money market funds
are not insured by the Philipppine Deposit Insurance Commission, unlike your
savings account or time deposits.

They may also not pay more than savings accounts or time deposits,
especially when you factor in all the fees and charges. Some banks or mutual
fund companies have a high initial amount of investment, so this can be a
problem for people who want to invest but don’t have the required amount.

Final Thoughts

Just like with any investment, you must consider your current financial status
and your financial goals before you get a money market fund. How much risk
are you willing to take to grow your funds? If you want to know if this type of
investment is right for you, ask yourself if this money that you don’t plan on
using in the next 6 to 12 months.

Do your own research on the best money market fund in the Philippines and
determine what is a suitable money market placement for you. Choose a
company that has a proven track record when it comes to security and
stability. It won’t hurt if they also provide top notch customer service to answer
all your money market fund-related inquiries!

https://www.moneymax.ph/personal-finance/articles/money-market-funds

2. Certificate of Deposit (CD)

A certificate of deposit (CD) is issued directly by a commercial bank, but it can

be purchased through brokerage firms. It comes with a maturity date ranging
from three months to five years and can be issued in any denomination.

Most CDs offer a fixed maturity date and interest rate, and they attract a
penalty for withdrawing prior to the time of maturity. Just like a bank’s
checking account, a certificate of deposit is insured by the Federal Deposit
Insurance Corporation (FDIC).

Certificates of Deposit (CDs)

Most certificates of deposit (CDs) are not strictly money market funds
because they are sold with terms of up to 10 years. However, CDs with terms
as short as three months to six months are available.

As with money market accounts, bigger deposits and longer terms yield better
interest rates. Rates in August 2021 for 12-month CDs ranged from about
0.50% to 0.70% depending on the size of the deposit. Unlike a money market
account, the rates offered with a CD remain constant for the deposit period.
There is usually a penalty associated with an early withdrawal of funds
deposited in a CD.
 Commercial Bills
Commercial bills, also a money market instrument, works more like the bill of
exchange. Businesses issue them to meet their short-term money
requirements.
These instruments provide much better liquidity. As the same can be
transferred from one person to another in case of immediate cash
requirements.

3. Commercial Paper

Commercial paper is an unsecured loan issued by large institutions or

corporations to finance short-term cash flow needs, such as inventory and
accounts payables. It is issued at a discount, with the difference between the
price and face value of the commercial paper being the profit to the investor.

Only institutions with a high credit rating can issue commercial paper, and it is
therefore considered a safe investment. Commercial paper is issued in
denominations of $100,000 and above. Individual investors can invest in the
commercial paper market indirectly through money market funds. Commercial
paper comes with a maturity date between one month and nine months.

Banker's Acceptances
The banker's acceptance is a short-term loan that is guaranteed by a bank.
Used extensively in foreign trade, a banker's acceptance is like a post-dated
check and serves as a guarantee that an importer can pay for the goods.
There is a secondary market for buying and selling banker's acceptances at a
discount.
A banker’s acceptance is a form of short-term debt that is issued by a firm but
guaranteed by a bank. It is created by a drawer, providing the bearer the
rights to the money indicated on its face at a specified date. It is often used in
international trade because of the benefits to both the drawer and the bearer.

The holder of the acceptance may decide to sell it on a secondary market,

and investors can profit from the short-term investment. The maturity date
usually lies between one month and six months from the issuing date.

5. Repurchase Agreements

A repurchase agreement (repo) is a short-term form of borrowing that involves

selling a security with an agreement to repurchase it at a higher price at a
later date. It is commonly used by dealers in government securities who sell
Treasury bills to a lender and agree to repurchase them at an agreed price at
a later date.
The Federal Reserve buys repurchase agreements as a way of regulating the
money supply and bank reserves. The agreements’ date of maturity ranges
from overnight to 30 days or more.

https://corporatefinanceinstitute.com/resources/fixed-income/what-is-money-
market/

Money Markets vs. Capital Markets

The money market is defined as dealing in debt of less than one year. It is
primarily used by governments and corporations to keep their cash flow
steady, and for investors to make a modest profit.

The capital market is dedicated to the sale and purchase of long-term debt
and equity instruments. The term "capital markets" refers to the entirety of the
stock and bond markets. While anyone can buy and sell a stock in a fraction
of a second these days, companies that issue stock do so for the purpose of
raising money for their long-term operations. While a stock's value may
fluctuate, unlike many money market products, it has no expiration date
(unless, of course, the company itself ceases to operate).

Can You Lose Money in the Money Market?

For depositors, most money market accounts are insured by the FDIC up to
$250,000 per institution. Because money market instruments are very low
risk, there is virtually no chance you will lose your money by owning a CD or
T-bill either. During periods of extreme financial stress, for example, during
the height of the 2008 financial crisis, some money market funds did "break
the buck" and briefly incur losses, but this was quickly corrected.
What are the risks of a money market fund?
1. Default Risk (Credit Risk) : Money market instruments carry the risk of
default. There is no guarantee that the borrower will repay the amount.
Therefore, there is a default risk associated with these instruments.
2. Interest Rate Risk : Fluctuations in the interest rates have an impact on
the yields. A higher volatile fund implies that it is exposed to higher interest
rate risk. In a scenario where interest rates fall, the opportunity cost of holding
this fund can be high.
3. Price Risk : Similar to share price fluctuations, there is a possibility that
prices of money markets funds fluctuate too. In other words, there is a chance
that the worth of the instrument might be lesser while selling.

4. Liquidity Risk : The inability to sell the instruments will result in liquidity
risk. Liquidity risk comes into play when a money market fund experiences
major unexplained cash outflows. The fund is forced to sell because there
aren’t enough liquid assets used to manage the outflows.
5. Inflation Risk : Similar to other assets, money market funds also
carry inflation risk. The returns from these investments may not be able to
keep up with the inflation rate in the economy.

What Are the Downsides of Money Markets?

Because they are virtually risk-free, money market investments also come
with very low interest rates - often the risk-free rate of return. As a result, they
will not provide substantial capital gains or investment growth compared to
riskier assets like bonds or stocks. Some types of money market accounts,
like CDs, furthermore can lock your money up until it matures, which can
range from months to years.
Factors to determine Interest Rates of Money Market Instruments
Currently, the interest rate is dependent on the market forces of demand for;
and supply of short term money.
Fiscal deficit, for example, occurs when the government expenditure is more
than government revenue. To fund this deficit, the government requires
money which in turn leads to borrowing by the government and hence
influencing the interest rates.
In other words, the higher the fiscal deficit more will be the money required by
the government. Hence, it will lead to an increase in interest rates.
What is Maturity?
The maturity in respect of money market instruments means the time period
within which the securities will mature. This is generally less than a year in
case of money market instruments.
What is the Yield on Security?
In simple words, the yield is the interest rate earned by investing securities It
can be calculated by the below formula:
Yield = (Face value – Sale value)/sale value* (days or months in a
year/period of discount)*100
Let’s understand the above with the help of an example:
Face value or amount of issue – Rs. 100
Period – 6 months
Discount rate – 10%
Discount – 100*(6/12)*(10/100) = Rs. 5
By using the above formula for yield we get
Y = (100-95)/100*(12/6)*100
Y = 10%

The Bottom Line

Money market accounts and money market funds are considered among the
safest ways to invest one's money. They also have much lower returns than
other investments, often even less than inflation. Because they are so low
risk, many people and businesses use money markets as a short-term
investment for their cash reserves.

https://www.investopedia.com/terms/m/moneymarket.asp

https://scripbox.com/mf/money-market-instruments/