How US Markets Affect Indian Stock

Market
It is lending to people who are less capable of repaying (More credit risk; Less credit
worthiness).In US some institutions has lend loans like this to such people(less capability to
repay). Since they are high risk loans interest rate will be high. These institutions also adopt a
process called securitization (conversion of these loans into tradeable securities).
In simple terms the institutions says that i will earn repayment every month from these
borrowers and institutions will trade this loan as bonds and investors will invest in it. As most
of the housing loans were traded like this in us these borrowers didn’t pay back.
So it led to non-performing assets in banks balance sheet. So investors in these bonds started
selling their bonds which pull down the us stock market. Everyone wanted to take their
money in these bonds as loans are not repaid.
It had an impact on Indian stock market as well some people who lost their money also
wanted to compensate their loss by selling shares they holded in Indian companies, this
pulled back Indian stock market also for a while.
Note: stock market will come down when sellers are more (bearish). It will go up when
buyers are more (bullish)
What did US GOVERNMENT DO to minimize this risk? They cut down the interest rates so
that people will borrow at lesser rate and invest. But this helped Indian market also because
they borrowed in us at lesser rate and invested in Indian market which is bullish now.thats is
why our market adjusted very quickly.
Rupee appreciation
It means i am able to but dollar at a cheaper rate.
That is for a particular amount of rupee I can buy more dollars.
When it happens. When we have sufficient amount of dollars in hand we don’t need more.
When US depends on Indian goods they have to pay in rupees and they exchange their dollars
for rupees with RBI and hence we have more dollars. When investments from US come into
India also this exchange takes place and hence we have more dollars and rupee appreciates.
Right now because of last reason our rupee has appreciated.
When rupee appreciated it is bad for exporters because say for every one dollar product they
sell in US they will get less rupees.It is good for importers because for a particular amount of
rupee in hand they can get more 1 dollar products and sell in India.
But some domestic manufacturers who manufacture and sell in India will get affected by
substitute import products because they become cheaper.
What RBI has done to curb appreciation is open up investment opportunities for Indians in
US. That means they allow them to invest more in us there by more dollars will be demanded
by them to invest and dollar demand will raise and rupee appreciation will come down.
But critics also comment on these that when US market is not good who will invest outside
and hence this didn’t have much impact on curbing the appreciation.

Indian Stock Market – I Don’t See a

Recession
ADVERTISEMENTS

I was one among the common man who was watching the market silently but sounds from
media and analyst’s everyday crossing decibels. Let me also contribute to that since I have
some regular visitors to my site.
Remember it is market psychology that drives the market now and not rationals. When we are
emotional we don’t think about what we do and simply utter words and the market is
behaving in the same way.
As I always said don’t be a herd in the market. Have your own taste of success or failure in
the stock market. If you really study the fundamentals of the company not by Ratios or High
funda financial terms but by common knowledge it will form the basis first in most of the
times.
First let me put my views on the market.
What’s the reason for Bull Run till now?
It’s simple. The value of Indian companies were reaching heights because we had investors
buying from outside.
We have to agree that it was over valued to a certain extent because of the bullish mentality
of FIIs and the credit availability terms they had like less interest rates etc.
What happened suddenly and markets became bearish?
When credit was tightened and interest rates were hiked in US most of the mortgage loans
were on floating rate and many people defaulted.
• This led to liquidity crises for lenders.
• There arouse a demand for money in US market.
• FIIs so who needed money started to sell their investments in India to get back money
for their livelihood and hence notional value of Indian stocks are going done.
• Indian economy is certainly insulated.
• Indian economy in terms of imports is not much dependent on US.
The good part of the story is that unlike China, which had an export oriented economy, the
Indian economy was based on the domestic market. The India’s trade theory is changing a lot
as it is turning out to be more of a manufacturing export oriented country. The net trade of
services done by India accounts to about just 22% just reflecting the risk on trade services is
tried to be minimized. Also in the current scenario the trade practices of India with US has
decreased and on the other hand has relatively increased with China reflecting out that the
risk of US recession has been deflected.
Also recent crisel research indicates
• Indian banks have limited vulnerability. (CRISIL RESEARCH).
• Indian banks’ global exposure is relatively small.
• International assets at about 6% of total assets.
• Even banks with international operations have less than 11% of their total assets
outside India.
• The reported investment exposure of Indian banks to troubled international financial
institutions of about $1 billion is also very small.
What’s Behind Indian Companies?
Indian companies’ notional value of its share prices has gone down but nothing like mortgage
crises in US.
They are strong on the asset base and in terms of fundamentals.
Just take a company like HERO HONDA. Just let’s look from layman point of view. I had
invested two years back and it never went up and it is going up now. In an average Indian
mindset this bike is something very common. The availability of credit will impact the sales
but it won’t have a drastic impact since it is almost a necessity as far as Indian market is
concerned when compared to other industry. I am not saying blindly buy by this. Take this as
core then do all fundamental and technical analysis and ponder on it.
Indian companies’ debt equity ratios are decent. Nothing like there is an internal failure in
terms of technology or accounting malpractice.
Only thing is companies in IT sector got projects from US and when their economy is down
no projects and hence no profit and its effect will be there in other industry as well.
So the basic thing is that there is money problem which Indian investors thought that their
investments will go up but no one to buy their portfolios. Others who has gained some profit
turned towards safer side seeing the risk in the market.
RBI measures will benefit banks on short run and companies on short run but the pumped in
1.4 lakh crores by CRR cut and others will be useful for stabilization if the companies gain
back their money which they have as inventories before the money pumped by RBI is eroded
as working capital.
This is a slow process and it will take nearly a year for the positive sentiment to gain back in
the market but our companies are fundamentally strong with less overseas exposure in their
investments in the collapsed financial institutions.
Share and Enjoy:
Primary Market
The Economic Survey suggested that the primary market was on the path of
recovery as the number of issues and the amounts raised marked an
improvement in
1999 compared to 1998. The figures released by SEBI for the 11 months Apr
1999 –
Feb 2000 show that while the number of issues increased from 51 to 82, the
amount
raised increased from Rs. 5,146 crores to Rs. 7,289 crores or by about 42 per
cent.
However, the public issue amount rose by 23 per cent. (See Table-1) These
figures
do not obviously represent a meaningful revival of the primary market due to the
low base for comparison and especially in the context of the substantial gains
recorded in theMutual Funds
Allied to the primary market and which seems to have had a major influence
on the trends in the secondary market in 1999 is the role of mutual funds (MFs).
While the government’s objective in offering tax concessions to equity-oriented
MFs
in its Budget 1999-2000 was to rescue the Unit Trust of India’s (UTI) flagship
scheme,
namely US-64, the benefit has been reaped extensively by the private sector
mutual
funds. During April 1999-February 2000, the private sector accounted for nearly
70
per cent of gross mobilisations and 76 per cent of mobilisations on net terms.
Data
available from the mutual fund industry association suggests that
correspondingly
there was a substantial jump in the net assets of private sector mutual funds. In
a
little more than a year, the share of private sector more than tripled and reached
nearly one-fourth of the total assets of MFs. (See Table-2) Even within the private
sector, MFs under full or partial control of foreign fund managers gained
substantially. In fact, MFs associated with foreign fund managers, account for 90
per
cent of assets under the private sector MFs. Another important development is
that
not only a number of funds promoted sector specific schemes corresponding to
the
golden triangle, a number of other schemes have come to rely on the triangle
even
though they do not call themselves as such. Having come to rely so heavily on a
few
sectors, MFs obviously have developed a vested interest in the fortunes of these
sectors and contributed to the already high concentration in the secondary
market.
Implications of these developments for the Indian stock market and
consequently for
the economy, demand special attention. Some indications of this may be seen in
the
trends in the sec
Secondary Market
The Survey exudes a sense of satisfaction that the stock market remained
buoyant over a fairly long period in 1999. The Survey also hinted at the price
volatility in the secondary market. Has the secondary market recovery been
accompanied by improving or worsening volatility? This question is important for
the long-term stability of the market. The fact is that the volatility increased in
1999-
2000. While the 30-share Sensex did reveal high volatility, what is more
important is
that even the broad-based 100-share National Index of the BSE too exhibited a
similarondary market described below. markphenomenon. The volatility was the
highest in the first three months of 2000. (See
Table-3) It is logical to expect that the situation would have been worse but for
the 8
per cent restriction on price chan

Types of Mutual Funds

Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open-ended Fund
An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous
basis. These Funds do not have a fixed maturity period. Investors can conveniently buy and sell
units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of
open-end schemes is liquidity.
Close-ended Fund
A close-ended Mutual fund has a stipulated maturity period e.g. 5-7 years. The fund is open for
subscription only during a specified period at the time of launch of the scheme. Investors can invest in
the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where the units are listed. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units to the mutual fund through
periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit
routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges.
These mutual funds schemes disclose NAV generally on weekly basis.
Fund according to Investment Objective:
A scheme can also be classified as growth fund, income fund, or balanced fund considering its
investment objective. Such schemes may be open-ended or close-ended schemes as described
earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such
schemes normally invest a major part of their corpus in equities. Such funds have comparatively high
risks. These schemes provide different options to the investors like dividend option, capital
appreciation, etc. and the investors may choose an option depending on their preferences. The
investors must indicate the option in the application form. The mutual funds also allow the investors to
change the options at a later date. Growth schemes are good for investors having a long-term outlook
seeking appreciation over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes
generally invest in fixed income securities such as bonds, corporate debentures, Government
securities and money market instruments. Such funds are less risky compared to equity schemes.
These funds are not affected because of fluctuations in equity markets. However, opportunities of
capital appreciation are also limited in such funds. The NAVs of such funds are affected because of
change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to
increase in the short run and vice versa. However, long term investors may not bother about these
fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes invest both
in equities and fixed income securities in the proportion indicated in their offer documents. These are
appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and
debt instruments. These funds are also affected because of fluctuations in share prices in the stock
markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital
and moderate income. These schemes invest exclusively in safer short-term instruments such as
treasury bills, certificates of deposit, commercial paper and inter-bank call money, government
securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds
are appropriate for corporate and individual investors as a means to park their surplus funds for short
periods.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk.
NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as
is the case with income or debt oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50
index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an
index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though
not exactly by the same percentage due to some factors known as "tracking error" in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the
stock exchanges.

ges in individual scrips.et barometers like the Sensex. money

market

Definition
Market for short-term debt securities, such as banker's acceptances, commercial
paper, repos, negotiable certificates of deposit, and Treasury Bills with a maturity of
one year or less and often 30 days or less. Money market securities are generally
very safe investments which return a relatively low interest rate that is most
appropriate for temporary cash storage or short-term time horizons. Bid and ask
spreads are relatively small due to the large size and high liquidity of the market.

Money Market
Mutual Funds
A money market fund is a mutual fund that invests solely in money market instruments. Money market
instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the
bulk of the money market instruments. Securities in the money market are relatively risk-free.

Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-
market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-
yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid
to the interest rate that is being offered.

Types of Money Market Mutual Funds

Money market funds are of two types:

1. Institutional Money Market Mutual Funds:

These funds are held by governments, institutional investors and businesses etc. Huge sum of money is parked
in institutional money funds.

2. Retail Money Market Mutual Funds:

Retail money market funds are used for parking money temporarily. The investment portfolio of money market
funds comprises of treasury bills, short term debts, tax free bonds etc.

Special Features of Money Market Mutual Funds

• Money market mutual funds are one of the safest instruments of investment for the retail low income
investor. The assets in a money market fund are invested in safe and stable instruments of investment
issued by governments, banks and corporations etc.
 • Generally, money market instruments require huge amount of investments and it is beyond the capacity
of an ordinary retail investor to invest such large sums. Money market funds allow retail investors the
opportunity of investing in money market instrument and benefit from the price advantage.
Money market mutual funds are usually rated by the rating agencies. So, check for the fund ratings before
investing.
Money Market and Capital Market
When we talk about Capital and Money Market, we can say
The capital and the money markets are two types of financial markets. The primary
difference between the two is that if the organizations have to borrow or invest funds
for a longer period of time then they go in the capital markets and if they want to
borrow or invest funds for a short period of time then they go for the money markets.
Secondly, capital markets deal with stocks and bonds while money markets deal
with certificates of deposits, bankers' acceptance, repurchase agreements and
commercial paper. Thirdly, there are more speculations in the capital market as
compare to the money market because capital market offers high maturity on the
credit instruments. Moreover, higher returns are paid on the securities traded in the
capital market as compare to the money market because of the high risk in capital
markets.
In order to understand what the differences between things are you first need to
understand what each of the items is. In this case before you can understand the
difference between capital markets and money markets you are going to need to
understand what capital markets are and what money markets are. Once you
understand the two items are it will be easier to see what the difference or
differences are between the two markets.

What is capital market?

Basically the capital market is a type of financial market, it includes the stocks and
bonds market as well. But in general the capital market is the market for securities
where either companies or the government can raise long term funds. One way that
the companies or the government raise these long term funds is through issuing
bonds, which is where a person buys the bond for a set price and allows the
government or company to borrow their money for a certain time period but they are
promised a higher return for allowing them to borrow the money, the higher return is
paid through interest that accrues on the money that the government or company
borrows.
Another way that the companies or government can raise money in the capital market
is through the stock market, most of the time you don't see the government as a part
of the stock market, but it can actually happen so we need to include them. But how
the stock market works is that the companies decide to sell shares of their stock,
which is basically ownership in the company, to ordinary people and other companies,
as a way to raise money. The people who buy the stock are usually given dividends
each year, if the company has agreed to pay out dividends, so that is another possible
return on their investment.
The capital market actually consists of two markets. The first market is the primary
market and it is where new issues are distributed to investors, and the secondary
market where existing securities are traded. Both of these markets are regulated so
that fraud does not occur and in the United States the U.S. Securities and Exchange
Commission is in charge of regulating the capital market. The capital market actually consists of
two markets. The first market is the primary
market and it is where new issues are distributed to investors, and the secondary
market where existing securities are traded. Both of these markets are regulated so
that fraud does not occur and in the United States the U.S. Securities and Exchange
Commission is

What is the money market?

Basically the money market is the global financial market for short-term borrowing and lending
and provides short term liquid funding for the global financial system. The average amount of
time that companies borrow money in a money market is about thirteen months or lower. Some
of the more common types of things used in the money market are certificates of deposits,
bankers' acceptance, repurchase agreements and commercial paper to name a few.
Basically what the money market consists of is banks that borrow and lend to each
other, but other types of finance companies are involved in the money market. What
usually happens is the finance companies fund themselves by issuing large amounts of
asset backed commercial paper that is secured by the promise of eligible assets into
an asset backed commercial paper conduit. Your most common examples of these are
auto loans, mortgage loans, and credit card receivables

in charge of regulating

What is the difference?

Basically the difference between the capital markets and money markets is that
capital markets are for long term investments, companies are selling stocks and bonds
in order to borrow money from their investors to improve their company or to
purchase assets. Whereas money markets are more of a short term borrowing or
lending market where banks borrow and lend between each other, as well as finance
companies and everything that is borrowed is usually paid back within thirteen
months.
Another difference between the two markets is what is being used to do the
borrowing or lending. In the capital markets the most common thing used is stocks
and bonds, whereas with the money markets the most common things used are
commercial paper and certificates of deposits.

the capital market. Money Market and its Instruments

Money Market: Money market means market where money or its equivalent
can be traded.
Money is synonym of liquidity. Money market consists of financial institutions
and dealers in
money or credit who wish to generate liquidity. It is better known as a place
where large
institutions and government manage their short term cash needs. For generation
of liquidity, short
term borrowing and lending is done by these financial institutions and dealers.
Money Market is
part of financial market where instruments with high liquidity and very short
term maturities are
traded. Due to highly liquid nature of securities and their short term maturities,
money market is
treated as a safe place. Hence, money market is a market where short term
obligations such as
treasury bills, commercial papers and banker’s acceptances are bought and sold.
Benefits and functions of Money Market: Money markets exist to facilitate
efficient transfer of
short-term funds between holders and borrowers of cash assets. For the
lender/investor, it
provides a good return on their funds. For the borrower, it enables rapid and
relatively
inexpensive acquisition of cash to cover short-term liabilities. One of the primary
functions of
money market is to provide focal point for RBI’s intervention for influencing
liquidity and
general levels of interest rates in the economy. RBI being the main constituent in
the money
market aims at ensuring that liquidity and short term interest rates are
consistent with the
monetary policy objectives.
Money Market & Capital Market: Money Market is a place for short term
lending and
borrowing, typically within a year. It deals in short term debt financing and
investments. On the
other hand, Capital Market refers to stock market, which refers to trading in
shares and bonds of
companies on recognized stock exchanges. Individual players cannot invest in
money market as
the value of investments is large, on the other hand, in capital market, anybody
can make
investments through a broker. Stock Market is associated with high risk and high
return as against
money market which is more secure. Further, in case of money market, deals are
transacted on
phone or through electronic systems as against capital market where trading is
through
recognized stock exchanges.
Money Market Futures and Options: Active trading in money market futures
and options
occurs on number of commodity exchanges. They function in the similar manner
like any other
futures and options.
Money Market Instruments: Investment in money market is done through
money market
instruments. Money market instrument meets short term requirements of the
borrowers and
provides liquidity to the lenders. Common Money Market Instruments are as
follows:
 T reasury Bills (T-Bills): Treasury Bills, one of the safest money market
instruments, are
short term borrowing instruments of the Central Government of the Country
issued through
the Central Bank (RBI in India). They are zero risk instruments, and hence the
returns are not
so attractive. It is available both in primary market as well as secondary market.
It is a
promise to pay a said sum after a specified period. T-bills are short-term
securities that
mature in one year or less from their issue date. They are issued with three-
month, six-month
and one-year maturity periods. The Central Government issues T- Bills at a price
less than
their face value (par value). They are issued with a promise to pay full face value
on maturity.
So, when the T-Bills mature, the government pays the holder its face value. The
difference
between the purchase price and the maturity value is the interest income earned
by the
purchaser of the instrument. T-Bills are issued through a bidding process at
auctions. The bid
can be prepared either competitively or non-competitively. In the second type of
bidding,
return required is not specified and the one determined at the auction is
received on maturity.
Whereas, in case of competitive bidding, the return required on maturity is
specified in the
bid. In case the return specified is too high then the T-Bill might not be issued to
the bidder.
At present, the Government of India issues three types of treasury bills through
auctions,
namely, 91-day, 182-day and 364-day. There are no treasury bills issued by
State
Governments. Treasury bills are available for a minimum amount of Rs.25K and
in its
multiples. While 91-day T-bills are auctioned every week on Wednesdays, 182-
day and 364-
day T-bills are auctioned every alternate week on Wednesdays. The Reserve
Bank of India
issues a quarterly calendar of T-bill auctions which is available at the Banks’
website. It also
announces the exact dates of auction, the amount to be auctioned and payment
dates by
issuing press releases prior to every auction. Payment by allottees at the auction
is required to
be made by debit to their/ custodian’s current account. T-bills auctions are held
on the
Negotiated Dealing System (NDS) and the members electronically submit their
bids on the
system. NDS is an electronic platform for facilitating dealing in Government
Securities and
Money Market Instruments. RBI issues these instruments to absorb liquidity from
the market
by contracting the money supply. In banking terms, this is called Reverse
Repurchase
(Reverse Repo). On the other hand, when RBI purchases back these instruments
at a specified
date mentioned at the time of transaction, liquidity is infused in the market. This
is called
Repo (Repurchase) transaction.
 R epurchase Agreements: Repurchase transactions, called Repo or Reverse
Repo are
transactions or short term loans in which two parties agree to sell and
repurchase the same
security. They are usually used for overnight borrowing. Repo/Reverse Repo
transactions can
be done only between the parties approved by RBI and in RBI approved
securities viz. GOI
and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc.
Under
repurchase agreement the seller sells specified securities with an agreement to
repurchase the
same at a mutually decided future date and price. Similarly, the buyer purchases
the securities
with an agreement to resell the same to the seller on an agreed date at a
predetermined price.
Such a transaction is called a Repo when viewed from the perspective of the
seller of the
securities and Reverse Repo when viewed from the perspective of the buyer of
the securities.
Thus, whether a given agreement is termed as a Repo or Reverse Repo depends
on which
party initiated the transaction. The lender or buyer in a Repo is entitled to
receive
compensation for use of funds provided to the counterparty. Effectively the seller
of the
security borrows money for a period of time (Repo period) at a particular rate of
interest
mutually agreed with the buyer of the security who has lent the funds to the
seller. The rate of
interest agreed upon is called the Repo rate. The Repo rate is negotiated by the
counterparties
independently of the coupon rate or rates of the underlying securities and is
influenced by
overall money market conditions.
 C ommercial Papers: Commercial paper is a low-cost alternative to bank
loans. It is a short
term unsecured promissory note issued by corporates and financial institutions
at a
discounted value on face value. They are usually issued with fixed maturity
between one to
270 days and for financing of accounts receivables, inventories and meeting
short term
liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit
period 6
months. It will not be able to liquidate its receivables before 6 months. The
company is in
need of funds. It can issue commercial papers in form of unsecured promissory
notes at
discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The
company has
strong credit rating and finds buyers easily. The company is able to liquidate its
receivables
immediately and the buyer is able to earn interest of Rs 10K over a period of 6
months. They
yield higher returns as compared to T-Bills as they are less secure in comparison
to these
bills; however chances of default are almost negligible but are not zero risk
instruments.
Commercial paper being an instrument not backed by any collateral, only firms
with high
quality credit ratings will find buyers easily without offering any substantial
discounts. They
are issued by corporates to impart flexibility in raising working capital resources
at market
determined rates. Commercial Papers are actively traded in the secondary
market since they
are issued in the form of promissory notes and are freely transferable in demat
form.
 C ertificate of Deposit: It is a short term borrowing more like a bank term
deposit account. It
is a promissory note issued by a bank in form of a certificate entitling the bearer
to receive
interest. The certificate bears the maturity date, the fixed rate of interest and the
value. It can
be issued in any denomination. They are stamped and transferred by
endorsement. Its term
generally ranges from three months to five years and restricts the holders to
withdraw funds
on demand. However, on payment of certain penalty the money can be
withdrawn on demand
also. The returns on certificate of deposits are higher than T-Bills because it
assumes higher
level of risk. While buying Certificate of Deposit, return method should be seen.
Returns can
be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In
APY,
interest earned is based on compounded interest calculation. However, in APR
method,
simple interest calculation is done to generate the return. Accordingly, if the
interest is paid
annually, equal return is generated by both APY and APR methods. However, if
interest is
paid more than once in a year, it is beneficial to opt APY over APR.
 B anker’s Acceptance: It is a short term credit investment created by a non
financial firm and
guaranteed by a bank to make payment. It is simply a bill of exchange drawn by
a person and
accepted by a bank. It is a buyer’s promise to pay to the seller a certain specified
amount at
certain date. The same is guaranteed by the banker of the buyer in exchange for
a claim on
the goods as collateral. The person drawing the bill must have a good credit
rating otherwise
the Banker’s Acceptance will not be tradable. The most common term for these
instruments
is 90 days. However, they can very from 30 days to180 days. For corporations, it
acts as a
negotiable time draft for financing imports, exports and other transactions in
goods and is
highly useful when the credit worthiness of the foreign trade party is unknown.
The seller
need not hold it until maturity and can sell off the same in secondary market at
discount from
the face value to liquidate its receivables.
An individual player cannot invest in majority of the Money Market
Instruments, hence for
retail market, money market instruments are repackaged into Money
Market Funds. A
money market fund is an investment fund that invests in low risk and low return
bucket of
securities viz money market instruments. It is like a mutual fund, except the fact
mutual funds
cater to capital market and money market funds cater to money market. Money
Market funds can
be categorized as taxable funds or non taxable funds.
Having understood, two modes of investment in money market viz Direct
Investment in Money
Market Instruments & Investment in Money Market Funds, lets move forward to
understand
functioning of money market account.
Investment in
Money Market
Direct Investment
in Money Market
Instruments
Investment in
Money Market
Funds
Parking money in
Money Market
Account
Money Market Account: It can be opened at any bank in the similar fashion as
a savings
account. However, it is less liquid as compared to regular savings account. It is a
low risk account
where the money parked by the investor is used by the bank for investing in
money market
instruments and interest is earned by the account holder for allowing bank to
make such
investment. Interest is usually compounded daily and paid monthly. There are
two types of
money market accounts:
• Money Market Transactional Account: By opening such type of account, the
account
holder can enter into transactions also besides investments, although the
numbers of
transactions are limited.
• Money Market Investor Account: By opening such type of account, the account
holder can only do the investments with no transactions.
Money Market Index: To decide how much and where to invest in money
market an investor
will refer to the Money Market Index. It provides information about the prevailing
market rates.
There are various methods of identifying Money Market Index like:
• Smart Money Market Index- It is a composite index based on intra day price
pattern
of the money market instruments.
• Salomon Smith Barney’s World Money Market Index- Money market
instruments are
evaluated in various world currencies and a weighted average is calculated. This
helps in determining the index.
• Banker’s Acceptance Rate- As discussed above, Banker’s Acceptance is a
money
market instrument. The prevailing market rate of this instrument i.e. the rate at
which
the banker’s acceptance is traded in secondary market, is also used as a money
market index.
• LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered
Rate
also serves as good money market index. This is the interest rate at which banks
borrow funds from other banks.
By: Abhishikta Chadda, Associate Chartered Accountant, Membership No:
500597