FINANCIAL MANAGEMENT II

TOPIC: MONEY MARKET

Presented By:

NDONGBU MARIA

TANKOU NYUKEU GALOT

NCHINDA BENNIE

KENGRAN NESRIN
 PRESENTATION OF WORK
GENERAL INTRODUCTION

CHARACTERISTIC OF MONEY MARKET

IMPORTANCE OF MONEY MARKET

FEATURES OF MONEY MARKET

FUNCTIONS OF MONEY MARKET

CONSTITUENTS OF MONEY MARKET

INSTITUTIONS OF MONEY MARKET

MONEY MARKET INSTRUMENTS

HOW DOES MONEY MARKET WORKS

USER OF MONEY MARKET

CHARACTERISTICS OF DEVELOPED AND UNDEVELOPED MONEY

MARKET

DIFFERENCES BETWEEN MONEY MARKET AND CAPITAL MARKET

DISADVANTAGES OF MONEY MARKET

 GENERAL INTRODUCTION

Money market is an organized exchange market where participants can land and
borrow short term, high-quality debt securities with average maturities of one year or
less. It is a mechanism through which a larger part of the financial transaction of a
country is cleared. It actually does not deal with money or cash, but near substitutes
of money like trade bills, promissory notes, government papers or treasury bills
which are drawn for a short period, not exceeding one year. The money market deals
with short term funds and helps to convert short term instruments into cash ready
without any loans and at low transaction cost.

Definition

Money market refers to institutional arrangement dealing with the short term
borrowing and lending of funds. It is a short credit market which deals with the
relatively liquid and quickly marketable assets, like short term securities, Treasury
bill of exchange. The reserve bank of India defines it as “the centre for dealing, mainly
of a short term character, in monetary assets, it meet the short term requirements of
borrowers and provides liquidity or cash to the lender”. According to Crowther,
“Money market is a collective name given to the various forms and institutions that
deal with the various grades of near money.”

CHARACTERISTICS OF MONEY MARKET

The following characteristics are given below;

1. Short Term Maturity

2. High Liquidity
3. Low Risk
4. Lower Return
 Short Term Maturity
Money market instruments have a maturity period of one year or less. This
makes them ideal for investors seeking short-term investment opportunities
with moderate return generation potential.

High Liquidity
Money market instruments are highly liquid meaning they can easily be
converted into cash without significant loss of value. This makes them
attractive for managing short term financial needs.

Low Risk
Money market instruments are consider low risk because of their short
maturity and creditworthiness of their issuer and for securities issued by the
government. Since issuer of money market instruments are high credit rating
and the returns are fixed beforehand, the risk of losing you invested capital is
minuscule.

Lower Returns
Because of their low risk, returns on money market instruments are typically
low compared to long term investments. Since they are offered at a discount to
the face value, the amount that investors get on maturity is decided in
advance.

No Physical Location
Unlike stock markets, the money market does not have a centralized or
physical exchange, it operates over-the-country (OTC)

IMORTANCE OF MONEY MARKET

The money market plays an important role in the process of industrial and
commercial progress of the nation. A well-developed money market is essential for a
modern digital economy. The money market has an important role to play in the
economic development of a nation.
Here are some key reasons highlighting the importance of money market:

1. Sources of Capital
2. Ideal Investment
3. Effective Monetary Management
4. Economic Development
5. Facilitating Trade
6. Helpful to Government

Sources of Capital

The money market is an important source of financing for trade and industry. The
short-term finances are made available through bills, commercial papers, etc. The
happenings in the money market influence the availability of finances both for
national and international trade.

Besides trade and industry, the money market offers the government an important
non-inflationary avenue for raising short-term funds through bills that are subscribed
to by commercial banks and the public.

Ideal Investment

The money market offers an ideal source of investment for commercial banks. The
market helps them invest their short-term surplus funds so as to meet statutory
reserve requirements. For instance, the requirements of the Cash Reserve ratio (CRR)
and the Statutory Liquidity Ratio (SLR) vary every fortnight depending upon banks’
net demand and time liability (NDTL).

Effective Monetary Management

An efficient money market being sensitive in nature allows for the effective
implementation of the monetary policy of the central bank and thus paves the way for
the efficient monetary management of the country. In fact, the money market events
serve as an important guide to the government in formulating, revising, and
implementing monetary policy.
This is rightly so, given the fact that the conditions prevailing in the money market
serve as an indicator of the monetary state of an economy. The monetary authority
uses the money market for diffusing the effects of its actions throughout the banking
system and the economy, so as to promote economic growth with stability.

Economic Development

The money market is an integral part of a country’s economy and contributes

substantially to the economic development of a country. A developed money market
is indispensable for the rapid development of the economy. In fact, the stage of
development of the economy will be reflected in the stage of development of a money
market. This is borne out by the fact that ill- the developed nature of a money market
is responsible for the primitive nature of the economic development of a country.

The absence of a well-developed money market would constrain the economies from
making available on a continuous basis the supply of adequate funds.

Facilitating Trade

The money market is of immense help to the business community in the following
ways:

● Providing an ideal payment mechanism makes it possible for expeditious

transfer of large sums of money.
● Meeting the working capital requirements for carrying out the production
and marketing activities.
● Making efficient investment of surplus funds into near-money assets which
can be quickly converted into money as and when needed.

Helpful to Government

The government uses the money market as an arena in which short-term funds are
raised by floating treasury bills. It helps the government to manage its monetary
position smoothly through the central bank of the country
 FEATURES OF MONEY MARKET

The features of money market are presented below:

1. Constituents
2. Dealers of Money Market
3. Near Money Asset
4. No Need for Personal Contact
5. Short Term Funds
6. Heterogeneous Market
7. Fluctuations

Constituents

The money market has three constituents such as

i) It has borrowers and lenders

ii) It deals with short-term credit instruments
iii) It has a price in the form of a rate of interest.

Dealers of Money Market

Generally, the markets are participated by lenders and borrowers. The borrowers in
the money market are manufacturers, traders, speculators, and government
institutions. Generally, the lenders in the money market are commercial banks,
central banks, and non-banking financial intermediaries.

Near Money Asset

The money market deals in short-term financial instruments which are called “Near
money assets”. These assets are liquid and readily marketable.

These assets are useful and against which the funds can be borrowed from the money
market. These near-money assets include bills of exchange, Bills Receivables, and
short-term government securities.
No Need for Personal Contact

The money market is not restricted to a particular place. It is a place where borrowers
and lenders meet each other. But in normal practice, it is not necessary that the
borrowers and lender should have personal contact with each other at a specified
place.

The parties may carry on their deals through telephone or mail. Therefore the money
market relates to arrangements for the transfer of funds between lenders and
borrowers.

Short Term Funds

The money market provides funds to the needy party for the short-term period. The
borrowers can obtain funds for periods ranging from a day to six months.

Heterogeneous Market

The money market consists of several sub-markets. Each market deals with a
specified short-term credit instrument, forex, bills market, or call money market.

Fluctuations

Money markets change with time. The functions of money markets in different
countries are broadly the same. But the financial institutions and the instruments
vary considerably from country to country.

FUNCTIONS OF MONEY MARKET

Here are they following functions of money market;

1. Short Term Borrowing and Lending

2. Liquidity Management
3. Finance Trade and commerce
4. Risk Mitigation
5. Investor Diversification
Short Term Borrowing and Lending

The money market severs as a platform for institutions to meet their shot term
funding needs. Banks, corporations and governments borrow money for a brief
period usually less than a year. This bridges gap in their cash flow or fund’s
immediate requirements. On the other hand, lenders provide these funds in exchange
for interest income, it allow them to earn a return on their surplus fund.

Liquidity Management

Money market helps companies and financial institutions to manage their short-term
liquidity needs by providing a platform to borrow and lend funds for short period.
This makes investors to swiftly access their fund in need and makes money market
reliable option for managing short-term liquidity requirements.

Financing Trade and Commerce

Money market provide financing solutions for Exporters and Importers. Instruments
like letter of credit and banker’s acceptances facilitate cross-border transactions.
Importers can use instrument to assure payment to exporters, while exporters can
obtain funds before the good are delivered. This promote smoother trade activities
and reduces the risk of international transactions.

Risk Mitigation

Corporations and financial institutions manage their interest rate and liquidity risk
through the money market. Derivatives and short term financing options, such as
repurchase agreements (Repos), enable them to hedge against adverse market
movements. This enhance financial stability and enable businesses to navigate
uncertain market conditions more effectively.

Investors Diversification

The money market broadens investment opportunities for individual and

institutional investors. Investor can diversify their portfolios beyond traditional
stocks and bond by participating in money market activities. This reduces overall
portfolio risk and provides a balances investment approach the aligns with varying
risk tolerances and financial goals.
 CONSTITENTS OF MONEY MARKET
Money market is not a homogeneous market, it is a borrowed of heterogeneous sub-
market, each specializing in a specific short term credit instrument. The following are
the important constituents of money market.

1. Call Money Market

2. Bill Market
3. Acceptance market
4. Collateral loan market

Call Money Market

The call money market deals with very short period or call loans. Bill brokers and
dealers in the stock exchange generally borrowed money at call from the commercial
banks. These loans are granted at a very short period, not exceeding seven days in any
case. The borrowers have to repay the loan immediately whenever the banks call
them back, no collateral securities are required against these loan.

Collateral Loan Market

This refers to a market for loan secured against collateral securities like stocks and
bonds. The collateral is returned to the borrower at the time when he repays the loan.
Collateral are mostly granted by the commercial banks to private parties in the
market and for a short period of a few months.

Acceptance Market

This is a market for the banker’s acceptance, it is a draft drawn by a business firm
upon a bank and accepted by it whereby the bank is required to pay to the order of a
specific party or to the bearer of a specific sum of money at a specific future date.
They are mostly used in financing the commercial transaction both within and
outside the country.

Bill Market

It is specializes in the sales and purchase of different types of short term papers or
bills. The important types of bill are: bills of exchange and treasury bills. Since
discounting of bills is the main business in the bill market, it is also known as
discount market. It should be noted that the bill market does not deals with long term
treasury bonds and other long term paper of which involves long term lending.

Bill of Exchange:

The bill of exchange is a written unconditional order signed by the drawer (seller)
requiring the drawee (buyer) to pay on demand or at a fixed future data a definite
sum of money. After the bills have been drawn by the drawer (seller), it is accepted by
the drawee (buyer). Once the buyer puts his acceptance on the bill, it becomes a legal
document. Such bills of exchange are discounted and re-discounted by the
commercial banks for lending credit to the bill brokers or for borrowing from the
central banks.

Treasury Bills:

While the bill of exchange is a commercial paper, the Treasury bill is government
paper. The treasury bills are short term government securities generally of three
months duration. They are sold by the central bank on behalf of the government.
They bear no interest rate and are offered on his basis of competitive bidding. Thus
those who are satisfied with the lowest interest rate will be allotted the bills. Treasury
bills, being government papers, inspire greater confidence among the investors.

INSTITUTIONS OF MONEY MARKET

The institutions of money market deal with the short term lending and borrowing of
funds. The important institutions of money market are commercial banks central
bank, acceptance house, nonblank financial institutions, bill brokers, etc.

Commercial Banks:
Commercial banks are the most important constituents of the money market.
They form the largest source of the short term funds for financing trade and
commerce in the country. They discount and rediscount bills of exchange and
treasury bills. While conducting their lending operations the commercial
banks try to reconcile the two conflicting objectives of liquidity and
 profitability. In other words, they try to ensure that the funds not only bring
high interest earnings, but also, at the same time, remain in a liquid form.
Central Bank:
The central bank is the apex institution in the money market of a country. It is
the lender of the last resort. It means that the member banks can approach the
central bank for loans and advances during emergency. Through its function as
the lender of the last resort, the central bank controls the working of the
money market.
Acceptance Houses, Discount Houses and Bill Brokers:
Acceptance houses, discount houses and the bill brokers are the important
institutions in advanced countries. Acceptance houses specialize in acceptance
and guaranteeing of trade bills. Discount houses and bill brokers deal in the
purchase and sale of the bills of exchange and also other types of bills.
Non-banking Financial Institutions:
The non-bank financial institutions, like insurance companies, saving banks,
etc., also deal with short term lending business in the money market.

MONEY MARKET INSTRUMENT

Money market instruments are financial contracts that are traded in the money
market for periods of less than a year. The institutions that offer money market
instruments to the lenders (investors) include commercial banks, corporations,
government, non-banking financial institutions, etc.

Some of the examples of money market instruments include commercial papers,

treasury bills, certificates of deposits, etc. Some of the popular money market
instruments have been defined below:

Certificate of Deposit (CD)

These certificates are issued directly by a commercial bank at a discounted rate, and
their tenure usually ranges from seven days to one year. CDs function similarly to a
bank fixed deposit, except for the higher negotiating factor and higher liquidity.
Introduced by the Reserve Bank of India (RBI) in 1989, CDs have become a popular
investment option for investors looking for short-term assets since they carry no risk
while offering interest rates greater than those offered by fixed deposits.

Treasury Bills

These are issued by the Government of India when it requires funds to meet its short-
term requirements. The treasury banknotes are issued at a discounted value and are
traded on primary and secondary markets.

Since treasury bills are backed by the sovereign, the associated risk is negligible.
However, these securities do not generate any interest. The only profit is the
difference between the maturity value of the bill and its discounted purchase price.

Commercial Papers

This is an unsecured money market instrument issued by well-established

corporations as promissory notes. The maturity period of these instruments is less
than a year; hence, the interest rate is quite low if you compare it with other debt
securities.

This money market instrument enables corporate borrowers to avail of short-term

borrowing by raising capital directly from the market.

Repurchase Agreements

Also known as buybacks, these are formal agreements between two parties where the
issuer offers a guarantee to repurchase the security in the future. These transactions
can only be made between two parties that are approved by RBI, as repurchase
agreements usually involve trading of government securities. The date of purchase
and interest rate is predetermined.

Banker’s Acceptance

Issued by commercial banks, this is a financial document that guarantees a future

payment to the lender. The document clearly mentions the repayment terms,
including the date of repayment and the amount to be repaid. The maturity period of
this safe and reliable instrument usually ranges from 30 days to 180 days.
 HOW DOES MONEY MARKET WORK

The money market comprises of different stakeholder like retail investors, financial
institutions, governments, and large businesses and corporations. All stakeholders
participate in money market through short-term borrowing and lending of funds.
This helps with the availability of liquidity to meet any cash flow requirements for the
participants. Here is how the mechanism of the money market works:

Borrowers

These entities could be corporations or even governments who need short-term funds
to fulfil their financial obligations. To raised funds, they issue money market
instruments, which act as a way of borrowing from potential investors.

Money Market Instruments

Borrowers issue various instruments such as treasury bills, commercial papers,

certificate of deposit, etc. which helps investors who have surplus funds and are
looking for short-term investment buy these securities from the money market since
these instruments are quite low-risk and highly liquid.

Trading and Secondary Market

The trading of money market instruments on the secondary markets is a

straightforward process, allowing investors too easily by and ell their investment. Thi
also adds to the liquidity of these instruments’, as a security holder does not have to
wait until maturity.

Money Market Funds

These are managed by professionals allowing retail and institutional investors to

invest indirectly in money market instruments. The money market funds pool
investments offering a diversified portfolio for their investment.

Regulatory Oversight

The money market environment, like all other investment avenues, is tightly regulate
and monitored to ensure all rules and criteria are followed. This ensure all clarity,
transparency, and fair trade practices for all the parties involved.
 USER OF MONEY MARKET
The money market see many participants, such as big corporations, governments,
financial institutions, and retail investors. Here, is a brief overview of the different
groups and how they get involved with the money market:

Governments

The government, play a very significant role in the money markets by issuing treasury
bills to raise debts to meet their financial obligations or any other short-term
requirement of funds. They are considered highly stable, secure, and risk-free.

Corporations

Corporations of different scales and sizes also issue money market instruments in the
form of commercial papers to raise funds. Commercial papers (CPs) are a form of
unsecured promissory notes that aim to raise money for various operational
purposes, capital expenditures or any other business management function.

Financial Institutions

Financial institutions and bank are also active players in the money market
ecosystem. The make use of various money market instruments to meet regulatory
requirements and manage their liquidity needs. They also consider money market
instruments as a source of stable income to help maintain their cash positions.

Individual Investors

This includes retail investors how look forward to invest in money market
instruments like treasury bills, certificates of deposit, commercial papers, and money
market funds offered by certain banks or investment houses. These avenues are
viewed by individual investors as an option to park any short-term surplus funds
while earning decent returns.

Central Banks

They play a vital role in the money market by implementing monetary policy actions.
They employs tools such as open market operations to purchase or sell, money
market instruments to control the money supply, affect interest rates, and stabilise
financial markets.
CHARACTERISTICS OF DEVELOPED AND UNDEVELOPED
MONEY MARKET

A. DEVELOPED MONEY MARKET

This is a highly efficient, organized, and liquid marketplace for short-term borrowing
and lending, typically for assets with maturities of less than one year. It plays a
crucial role in stabilizing the financial system by providing liquidity, enabling smooth
fund flow, and supporting central bank policy implementation. It also plays an
important role in supporting economic growth, financial stability, and investment
opportunities. The characteristics are as follows;

I. Diversified interest rates

* Diverse financial instruments

A variety of short term instruments such as; Treasury bills(government securities

with maturities ranging from a few days to one year),commercial
paper(Unsecured, short-term debt instrument issued by corporations to meet
immediate funding needs),certificate of deposit(Time deposits offered by banks
with fixed interest rates and maturity dates),repurchase agreements, and call
money( also known as call loan or overnight money, refers to a type of short-term
loan or borrowing arrangement where funds are lent or borrowed for a very short
period, typically overnight or for a few days.)

*Efficient interest rate mechanism

Interest rates in a developed money market are determined efficiently based on

supply and demand, reflecting current economic conditions. These rates often serve
benchmarks for other rates in the economy (it means that it is used as a reference
point for determining interest rates on other financial instruments or loans. This
benchmark rate is often used to set the interest rate on variable-rate loans, deposits
in banking, mortgages, or other financial products. For example Secured
overnight financing rate *SOFR*, and prime rate).

II. Liquidity

This is an extremely liquid market and deals with fixed- income securities. It allows
participants to buy and sell instruments with minimal delay. Liquidity is crucial as
it enables quick fund access for borrowers and easy investment exit for lenders,
contributing to market stability. It also refers to how quickly and easily an asset can
be bought or sold without causing a significant impact on its price.

Money market instruments offer high liquidity because they have short maturities,
typically less than 18 months. Investors can easily convert these instruments into
cash, making them suitable for short-term cash management and investment needs.

These markets also allow investors to trade them before maturity, providing even
greater liquidity.

A good example of high liquidity is the certificates of Deposit (CDs). They are a
common money market instrument with short maturities. They can typically be sold
in secondary markets before they mature. If an individual investor needs to access
cash before the CD’s maturity date, they can sell it to another investor in the
secondary market.

III. Efficient banking system

The existence of a developed money market greatly facilitates the smooth and
efficient functioning of the banking and financial system. Such an advantage
contributes to the promotion of trade and industry in the economy.

Further, the mediating role played by commercial bankers ensures the delivery of
credit at the most opportune time. Similarly, the money market enables commercial
banks to meet much of their unexpected needs for funds quickly and cheaply. It is
possible for commercial banks to utilize their funds profitably and with liquidity.
Here are some features of an efficient banking system; stability and security
(ensures the stability and security of deposits, protecting customers' funds and
maintaining confidence in the financial system), accessibility and Inclusivity
(provides accessible and inclusive financial services, enabling individuals and
 businesses to access credit, savings, and other financial products),efficient
transaction processing (facilitates fast and secure transaction processing,
enabling the smooth flow of funds and reducing transaction costs).

IV. Providing funds

The money market offers short term loans at lower interest rates, enabling private
and public institutions to meet their capital needs.

V. Central bank

Central banks plays an active role in developed money market, using open market
operations and monetary tools to manage liquidity and control inflation. Central
bank involvement helps maintain stability and ensures that the money market aligns
with broader economic policy goals.

VI. Reliable payment and settlement system

Developed market has a well-organized and reliable payment and settlement system
that ensures prompt execution of transaction. Efficient clearing and settlement
processes reduce the risk of counterparty defaults and improve trust among market
participants

VII. Transparency

High transparency is a hallmark of developed money market. Regular publication of

data interest rates, transaction volumes, and outstanding balances ensure that
participants have access to real time information, promoting informed decision
making and reducing speculation.

VIII. Regulatory oversight

Developed market operate under effective regulatory oversight that enforces

standards, protects participants, and prevents market manipulation. Regulatory
bodies ensure that all entities comply with the best practices, creating a safe trading
environment.
B UNDEVELOPED MONEY MARKET

An undeveloped money market, also known as an unorganized money market, is

characterized by limited participation, a lack of regulation, and the use of informal
lending practices. It's primarily dominated by local moneylenders, chit funds, and
other informal institutions, the indigenous bankers, traders, merchants, landlords,
pawnbrokers, etc. Operating outside the control of central banks or financial
regulators. The characteristics are as follows;

1. Limited Participation and Informal Structure:

Small Number of Participants:

The market is typically dominated by a small number of players, often local
moneylenders or informal credit providers.
Lack of Formal Institutions:
There's a scarcity of formal financial institutions like banks or investment
firms, and the market operates largely outside of the regulatory framework.
Informal Lending Practices:
Lending and borrowing are often done through informal networks and
arrangements, rather than formal contracts or agreements.

2. Lack of Regulation and Supervision:

No Central Bank or Regulator:

The market is not overseen by a central bank or other regulatory body, leading
to a lack of oversight and accountability.
Limited Transparency:
Information about lending terms, interest rates, and the overall functioning of
the market is often limited and opaque.
High Risk:
The lack of regulation and transparency creates a higher risk for both borrowers
and lenders, as there's less protection against default or other financial problems.
3. High Interest Rates and Limited Access to Credit:

High Interest Rates:

Due to the lack of competition and the high risk involved, interest rates in
undeveloped money markets are typically much higher than those in
developed markets.
Limited Access to Credit:
Borrowers, particularly those with limited collateral or credit history, may find
it difficult to access loans from formal financial institutions.
Exploitation of Vulnerable Borrowers:
The combination of high interest rates and limited access to credit can lead to the
exploitation of borrowers who are unable to find alternatives.

4. Limited Development of Instruments:

Focus on Simple Loans:

The instruments traded in the market are often limited to simple loans or call
loans between banks, with limited development of other instruments like
commercial bills or treasury bills.
Lack of Diversification:
There's a limited range of investment options, making it difficult for individuals
or institutions to diversify their portfolios.
Low Liquidity:
The lack of a well-developed market infrastructure and standardized instruments
can lead to lower liquidity and difficulty in selling or trading assets.

5. Limited Integration with Organized Markets:

Limited Interconnection:
There's often a lack of strong links between the unorganized money market
and the broader, organized financial system.
Difficulty in Accessing Funds:
It can be challenging for participants in the unorganized market to access
funds from the organized market, and vice versa.
 Challenges for Policy Makers:
The lack of integration makes it difficult for policymakers to implement effective
monetary policies and manage the overall financial system.

6. Personal Touch:

The lenders have a personal touch with the borrowers. The lender knows every
borrower personally in the village because the latter sides there.

7. Flexibility in Loans:

There is no rigidity in loan transactions. The borrower can have more or less amount
of loan according to his requirements depending upon the nature of security or his
goodwill with the moneylender.

8. Defective System of Accounting:

In the unorganised sector of the money market, the system of maintaining accounts is
highly defecate. Proper accounts are never maintained. Formal receipts are not issued
for interest and the principal repaid by the borrowers. Besides, there is utmost
secrecy in maintaining accounts and lending procedures in the undeveloped money
market. The accounts of the moneylenders are not liable to checking by any higher
authority.

DIFFERENCES BETWEEN MONEY MARKET and

CAPITAL MARKET
The money market is a market for short-term credit. The money market deals with
short-term lending and borrowing of funds. They are designed to provide liquidity
and facilitate the borrowing and lending of short-term funds. Common instruments
in money markets include Treasury bills, commercial papers, and certificates of
deposit. The primary participants in the money market include governments, banks,
and large institutions, which use it to manage short-term cash flow needs. The money
market is generally low-risk and offers relatively low returns. The capital market is
the long-term market. It is different on the basis of the maturity period capital market
deals with long-term borrowing and lending of funds. These markets are used for
raising capital for long-term investment and funding. Capital markets are divided
into the primary market, where new securities are issued, and the secondary market,
where existing securities are traded. Instruments traded in capital markets include
stocks, bonds, and other long-term securities. Investors in capital markets usually
take on higher risk but also have the potential for higher returns. Corporations,
governments, and other entities participate in capital markets to raise funds for
projects, expansion, and long-term operations.

DISADVANTAGES OF MONEY MARKET

Money markets, despite their benefits, have their fair share of disadvantages such as:

1. Lower returns

Although they are stable, they offer very low returns to investors in comparison with
other investment options like shares, stocks, or bonds, which translates to lower
earning potential and reduced capital appreciation.

2. Inflation risk: If the interest rates provided on money market instruments are
not keeping pace with inflation, then the value of the investment will diminish with
time and lead to reduced purchasing power for the investor.

3. Limited growth potential: Money market instruments primarily focus on the

preservation of capital and short-term management of liquidity. Hence, they are not
ideal for investors looking for long-term wealth growth.

4. Regulatory changes: These instruments can be affected by regulatory changes,

which can impact their performance and overall liquidity.

5. Limited investment options: Money market instruments provide you with a

limited set of investment options. If you desire higher returns and better opportunities
to grow your portfolio, you need to explore other financial market segments.