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ABSTRACT
The Money market in India correlation for short-term funds with maturity ranging from overnight to one year
in India including financial instruments that are deemed to be close substitutes of money. Similar to developed
economies the Indian money market is diversified and has evolved through many stages, from the conventional
platform of treasury bills and call money to commercial paper, certificates of deposit, repos, forward rate
agreements and most recently interest rate swaps.The India money market is a monetary system that involves
the lending and borrowing of short-term funds. India money market has seen exponential growth just after the
globalization initiative in 1992. It has been observed that financial institutions do employ money market
instruments for financing short-term monetary requirements of various sectors such as agriculture, finance and
manufacturing. The performance of the India money market has been outstanding in the past 20 years.
The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit.
The money market fulfills the borrowing and investment requirements of providers and users of short-term
funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism. It
also serves as a focal point for the central bank's intervention in the market. A well regulated financial sector is
essential in globalize economy. Financial innovation has contributed in the economic development. A financial
institution is an institution that provides financial services for its clients or members. Probably the most
important financial service provided by financial institutions is acting as financial intermediaries. Most
financial institutions are highly regulated by government.
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commercial papers in the market. Money market is considered a safe place to invest due to the high liquidity of
securities.
It has certain risks which investors should be aware of, one of them being default on securities such as
commercial papers. Money market consists of various financial institutions and dealers, who seek to borrow or
loan securities. It is the best source to invest in liquid assets. The money market is an unregulated and informal
market and not structured like the capital markets, where things are organized in a formal way. Money market
gives lesser return to investors who invest in it but provides a variety of products. Withdrawing money from the
money market is easier. Money markets are different from capital markets as they are for a shorter period of
time while capital markets are used for longer time periods. Meanwhile, a mortgage lender can create protection
against a fallout risk by entering an agreement with an agency or private conduit for operational, rather than
mandatory, delivery of the mortgage. In such an agreement, the mortgage originator effectively buys an option,
which gives the lender the right, but not the obligation, to deliver the mortgage. Against that, the private conduit
charges a fee for allowing optional delivery.
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5. The money market helps in the successful implementation of the monetary policies of the central bank. It is
through the money market that the Reserve Bank of India is in a position to control the banking system and
thereby influence commerce and industry.
6. By facilitating the transfer of funds from one sector to another, the money market helps in financial mobility.
Mobility in the flow of funds is essential for the development of commerce and industry in an economy.
7. One of the important functions of the money market, is that it promotes liquidity and safety of financial
assets. It thus encourages savings and investment.
8. The money market brings equilibrium between the demand and supply of loanable funds. This it does by
allocating savings into investment channels. In this way, it also helps in rational allocation of resources.
9. As the money market deals in near-money assets and not money proper it helps in economising the use of
cash. It thus provides a convenient and safe way of transferring funds, from one place to another, thereby
immensely helping commerce and industry.
VI. REDEMPTIONS
The new rules call for two types of liquidity fees that could impose pretty stiff fees on redemptions, especially
for these traditionally low return vehicles. If the money market funds weekly liquid assets fall below 30% of
the funds total assets then the board of directors of the fund may impose a 2% fee on fund redemptions. If the
money market funds weekly liquid assets fall below 10% of the funds total assets, redemptions would be
subject to a 1% percent redemption fee unless the board of directors votes otherwise. Both institutional and
retail municipal and prime/general purpose money market funds are subject to these new rules. If a money
market funds liquid assets were to fall below 30% of total assets the funds board of directors will be allowed to
vote on whether to restrict all fund redemptions for 10 days. Given that money market funds are typically used
for their low investment risk and liquidity the imposition of redemption gates could be problematic for many
investors.U.S. Treasury money market funds and funds that invest only in U.S. government issued securities are
exempt from the new rules including the floating NAV, redemption gates and redemption fees. This may result
in these being the money market funds of choice for many investors going forward.
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VII. SOME DEFINITIONS
Retail money market funds are essentially owned by individual investors. Note that money market funds offered
within a 401(k) are deemed to be owned by individuals as well. Institutional money market funds are defined as
being open to any shareholders including individuals, corporations, small businesses as well as institutional
accounts such as those for endowments and foundations.
Municipal money market funds investment mostly in municipal and other government money market and fixed-
income vehicles that provide tax-exempt income either at the national level or for a particular state.
Governmental money market funds invest in governmental securities, while U.S.Treasury money market funds
invest in Treasury instruments. Prime or general purpose money market funds invest across the spectrum of
government securities and non-governmental money market instruments.
Implications for investors
Fidelity Investments is in the process of asking shareholders to approve the conversion of three of its money
market funds to governmental funds in order to avoid the new rules and restrictions. While it is likely that many
investors will prefer governmental money market funds that will allow them to avoid the floating NAV and
redemption restrictions, it is also likely that these money funds will offer lower rates of interest going
forward.Certainly for funds that will be needed in the near-term money market funds will remain a viable
option, especially the governmental funds. However in many cases investors and financial advisors might look
at other options for the lower risk, shorter-term fixed income portion of their portfolios. These might include
short-term bond funds and other alternatives. Another option that many broker-dealers are considering is
moving their clients sweep account away from money market funds altogether and into bank deposit programs
offered via banking affiliates.
Alternatives With Added Risk
Since the announcement of these new rules at least a dozen new short-term bond mutual funds have been
launched including Vanguards Ultra Short-Term Bond Fund (VUBFX), although according to Vanguard the
launch was not related to the new money market fund rules.
Short-term bond funds will offer a higher yield than money market funds but also carry more market risk based
on their underlying holdings. According to Morningstar Inc. (MORN) the average ultrashort-term bond fund lost
7.89% during 2008. Financial advisors would be wise to remind clients seeking a bit more yield of the potential
risks of assuming these funds are a substitute for money market funds.
The Bottom Line
In an attempt to prevent a collapse of our financial system in the event of another economic meltdown on the
order of the financial crisis of 2008-2009, the SEC passed a number of changes in the rules governing money
market funds. Some funds will have redemption fees imposed upon shareholders in certain cases, while others
will see their NAV be allowed to fluctuate from the traditional stable $1 per share. These changes will force
investors and financial advisors to reexamine how they use money market funds and also to look for
alternatives.
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VII. 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.
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Returns." Journal of Finance.
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