What Are Money Market Securities?

The Money Market, despite its name, is not a place where currencies are traded. Rather, it is where low-risk, highly liquid, short term debt issued by governments, financial institutions and corporations are traded. The maturities of these debt securities typically range from one day to one year, but are often less than 90 days. Examples of money market securities include short-term debt backed by governments such as the treasury bills(‘T-Bills’), commercial papers, bankers’ acceptances, certificates of deposits and repurchase agreements. Due to the ease of transacting and the short-term nature of these instruments, the money market is typically seen as a safe place for investors to park money for a short period of time.

How They Work

Generally, money market instruments are priced at a 'discount' to their face values and, unlike bonds, typically do not pay out coupons. For example, a U.S. Treasury Bill with 90 days left to maturity may have a face value of $100,000, but is selling in the money market at $98,500. If an investor buys the T-Bill at this price, he would be able to redeem the bill from the U.S. government 90 days later when the bill matures at its face value ($100,000) and make a profit of $1,500 ($1,500 out of an investment of $98,500 over 90 days is equal to an annualised return of about 6% per annum). Such short term money market securities that are issued by large corporations and banks are referred to as commercial papers and bankers’ acceptances respectively.

Money market securities are generally considered to be very low risk securities. Apart from their short-term nature, the debt issuers of these securities are typically also of high credit quality with low default rates, leading returns on these securities to be usually perceived to be ‘guaranteed’! The U.S. Treasury Bills which are guaranteed by the U.S. government, are practically perceived to be default free and the 'discount rate' of these T-Bills (in our above example, 6%) are usually used as the proxy for the 'risk-free' rate of return. This is the rate of return frequently used in calculating the return an investment rewards investors for each unit of risk undertaken (such a measure is known as the Sharpe Ratio). In general, most investments are expected to offer a higher rate of return than T-Bills which are risk-free.

Given their low risks, money market securities provide one of the lowest potential returns in the investment universe and are thus often known as cash-equivalents. They form a great avenue to deposit money for a short period of time whilst gaining higher rates than that of fixed deposits but without losing the benefits of liquidity. Thus, they are typically great for risk-averse investors who are just starting on their investment journey! That being said, even for investors who are more seasoned, having a portion of one’s investment portfolio allocated to money market funds is still a considerable move given that this can potentially enhance the stability of overall portfolio returns and provide greater liquidity in times of market uncertainty and volatility and emergencies where a great amount of cash is required.

Investing In Money Markets

With many money market securities trading in very high denominations, they are often difficult for the average investor to gain access to. Thus, one of the easiest ways for an investor to gain access to the money market is to buy a money market unit trust or fund! Fret not, at FSM Global, one can find a good range of money market unit trusts to cater to investor preferences towards the money market! Given the stability of the returns offered by money market securities, you will likely find that some of these unit trusts have performed very consistently.