Investing In Money Market
When the stock market is bearish and underperforming or when someone has a short term excess cash, then the money market is a safe place to park one’s money for reasonable returns.
The Money Market is the market for all short-term debt instruments, usually up to 1 year. It is sometimes called a cash investments market due to the short investments terms and the fact that the money can easily be turned into liquid cash.
The money market simply means lending money to governments, corporate, municipalities etc for a specific return. These investments are considered fairly safe and so have lower returns. Higher rates of return are earned on large volumes of funds invested in the money market.
Funds invested in this market have fixed returns, but the interest receivable depends upon the market conditions prevailing at the time of investment. For example, opening and closing forecast position as derived by RBZ, and bankers.
Money Market services can be accessed by corporates, parastatals, local authorities and individuals alike.
Funds can be invested in the money market as demand deposits, fixed deposits or in financial assets.
The money market is critical in an investor’s portfolio because cash is king. You need to ensure significant cashflow availability. This allows you to manage emergencies and avoid borrowing. If you are asset rich but cash poor, you end up borrowing to meet urgent needs and consequently compound interest works against you rather than for you.
I love lending rather than borrowing. The book says you shall lend to many and borrow from none. The money market enables me to lend to banks, corporate and government.
In simple language the money market simple means you are lending money to gain interest from various players. Bankers call it buying bonds/bills etc. When you lend: to banks its called Certificates of Deposits (CDs), to government its called Treasury Bills (TBs), to corporate it is called Bankers Acceptances (BAs), etc
The critical aspects for you to consider with money market instruments are the following:
l How much interest or return do you get?
l How safe is your money both capital and interest? E.g default risk. In other words what is the likelihood of the borrower failing to repay the money.
l When do you get your money back? Maturity date.
While the money market is conservative with low returns it better than no return. It is a useful hedge when you are waiting to use your money for other things or when you are still considering an investment destination. It is also useful say for money you are keeping for end of month expenses for example. Instead of keeping it in the bank losing value, you can lend it out – in the very least you can use the interest to cover your bank charges.
In the following blogs we will discuss in detail a number of money market instruments. Hang on.