Tapping the benefit of Money Market Funds to create Winning Portfolio

Tapping the benefit of Money Market Funds to create Winning Portfolio.

Fund managers are often posed with the pressure of increasing the returns on their portfolio to match the competition and investors’ expectations. Whilst the long-term committed fund cannot be tweaked however, the working capital fund can be smartly deployed into money market to create a winning portfolio.

 

The money market and the capital market are not single institutions but two broad components of the global financial system.

The money market is the trade in short-term debt. It is a constant flow of cash between governments, corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight and no longer than a year.

 

The Money Market

The money market is a good place for individuals, banks, other companies, and governments to park cash for a short period of time, usually one year or less. It exists so that businesses and governments that need cash to operate can get it quickly at a reasonable cost, and so that businesses that have more cash than they need can put it to use.

 

The Capital Market

It encompasses the trade in both stocks and bonds. These are long-term assets bought by financial institutions, professional brokers, and individual investors.

 

Together, the money market and the capital market comprise a large portion of what is known as the financial market.

The money market is a short-term lending system. Borrowers tap it for the cash they need to operate from day to day. Lenders use it to put spare cash to work.

The capital market is geared toward long-term investing. Companies issue stocks and bonds to raise money to grow their businesses. Investors buy them to share in that growth.

The money market is less risky than the capital market while the capital market is potentially more rewarding.

The returns are modest but the risks are low. The instruments used in the money markets include deposits, collateral loans, acceptances, and bills of exchange. Institutions operating in the money markets include the Federal Reserve, commercial banks, and acceptance houses.

 

When a company or government issues short-term debt, it’s usually to cover routine operating expenses or supply working capital, not for capital improvements or large-scale projects.
Below is a quick calculation to understand better as to how fund managers can use the working capital for investing in Money market funds.

From the above, it is clear how daily funds can be used by fund managers for earning payouts (though at low rates) by deploying daily funds into money market.

 

About Liquidity

The money market plays a key role in ensuring that banks, other companies, and governments maintain the appropriate level of liquidity on a daily basis, without falling short and needing a more expensive loan and without hoarding excess cash that isn’t earning interest.

Individual investors may use the money markets to invest their savings in a safe and accessible place. Many choices are available, including mutual funds that focus on state money market funds, municipal funds, and U.S. Treasury funds. Many of the government funds are tax-free. A money-market fund also can be opened at most banks.

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NDM Advisors LLP