how us markets affect indian stock market

8/7/2019 How US Markets Affect Indian Stock Market

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How US Markets Affect Indian StockMarketIt is lending to people who are less capable of repaying (More credit risk; Less creditworthiness).In US some institutions has lend loans like this to such people(less capability torepay). 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 theseborrowers and institutions will trade this loan as bonds and investors will invest in it. As mostof the housing loans were traded like this in us these borrowers didnt pay back.

So it led to non-performing assets in banks balance sheet. So investors in these bonds startedselling their bonds which pull down the us stock market. Everyone wanted to take theirmoney in these bonds as loans are not repaid.

It had an impact on Indian stock market as well some people who lost their money alsowanted 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 whenbuyers are more (bullish)

What did US GOVERNMENT DO to minimize this risk? They cut down the interest rates sothat people will borrow at lesser rate and invest. But this helped Indian market also becausethey borrowed in us at lesser rate and invested in Indian market which is bullish now.thats iswhy 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 dont need more.When US depends on Indian goods they have to pay in rupees and they exchange their dollarsfor rupees with RBI and hence we have more dollars. When investments from US come intoIndia 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 theysell in US they will get less rupees.It is good for importers because for a particular amount ofrupee 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 bysubstitute import products because they become cheaper.

What RBI has done to curb appreciation is open up investment opportunities for Indians inUS. 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 outsideand hence this didnt have much impact on curbing the appreciation.

Indian Stock Market I Dont See a

Recession
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I was one among the common man who was watching the market silently but sounds frommedia and analysts everyday crossing decibels. Let me also contribute to that since I havesome regular visitors to my site.

Remember it is market psychology that drives the market now and not rationals. When we areemotional we dont think about what we do and simply utter words and the market is

behaving in the same way.

As I always said dont be a herd in the market. Have your own taste of success or failure inthe stock market. If you really study the fundamentals of the company not by Ratios or Highfunda financial terms but by common knowledge it will form the basis first in most of thetimes.

First let me put my views on the market.

Whats the reason for Bull Run till now?

Its simple. The value of Indian companies were reaching heights because we had investorsbuying from outside.

We have to agree that it was over valued to a certain extent because of the bullish mentalityof 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 loanswere 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 moneyfor 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, theIndian economy was based on the domestic market. The Indias trade theory is changing a lotas it is turning out to be more of a manufacturing export oriented country. The net trade ofservices done by India accounts to about just 22% just reflecting the risk on trade services istried to be minimized. Also in the current scenario the trade practices of India with US hasdecreased 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 assetsoutside India.

The reported investment exposure of Indian banks to troubled international financialinstitutions of about $1 billion is also very small.

Whats Behind Indian Companies?


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Indian companies notional value of its share prices has gone down but nothing like mortgagecrises in US.They are strong on the asset base and in terms of fundamentals.

Just take a company like HERO HONDA. Just lets look from layman point of view. I hadinvested 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 salesbut it wont have a drastic impact since it is almost a necessity as far as Indian market isconcerned when compared to other industry. I am not saying blindly buy by this. Take this ascore 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 interms of technology or accounting malpractice.

Only thing is companies in IT sector got projects from US and when their economy is downno 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 theirinvestments 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 in1.4 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 erodedas working capital.

This is a slow process and it will take nearly a year for the positive sentiment to gain back inthe market but our companies are fundamentally strong with less overseas exposure in theirinvestments in the collapsed financial institutions.

Share and Enjoy:

Primary MarketThe Economic Surveysuggested that the primary market was on the path ofrecovery as the number of issues and the amounts raised marked animprovement in1999 compared to 1998. The figures released by SEBI for the 11 months Apr1999 Feb 2000 show that while the number of issues increased from 51 to 82, theamountraised increased from Rs. 5,146 crores to Rs. 7,289 crores or by about 42 percent.However, the public issue amount rose by 23 per cent. (See Table-1) Thesefigures

do not obviously represent a meaningful revival of the primary market due to thelow base for comparison and especially in the context of the substantial gainsrecorded in theMutual FundsAllied to the primary market and which seems to have had a major influenceon the trends in the secondary market in 1999 is the role of mutual funds (MFs).While the governments objective in offering tax concessions to equity-orientedMFsin its Budget 1999-2000 was to rescue the Unit Trust of Indias (UTI) flagshipscheme,namely US-64, the benefit has been reaped extensively by the private sectormutual

funds. During April 1999-February 2000, the private sector accounted for nearly70


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per cent of gross mobilisations and 76 per cent of mobilisations on net terms.Dataavailable from the mutual fund industry association suggests thatcorrespondinglythere was a substantial jump in the net assets of private sector mutual funds. Inalittle more than a year, the share of private sector more than tripled and reachednearly one-fourth of the total assets of MFs. (See Table-2) Even within the privatesector, MFs under full or partial control of foreign fund managers gainedsubstantially. In fact, MFs associated with foreign fund managers, account for 90percent of assets under the private sector MFs. Another important development isthatnot only a number of funds promoted sector specific schemes corresponding tothegolden triangle, a number of other schemes have come to rely on the triangleeven

though they do not call themselves as such. Having come to rely so heavily on afewsectors, MFs obviously have developed a vested interest in the fortunes of thesesectors and contributed to the already high concentration in the secondarymarket.Implications of these developments for the Indian stock market andconsequently forthe economy, demand special attention. Some indications of this may be seen inthetrends in the secSecondary 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 pricevolatility in the secondary market. Has the secondary market recovery beenaccompanied by improving or worsening volatility? This question is important forthe long-term stability of the market. The fact is that the volatility increased in1999-2000. While the 30-share Sensex did reveal high volatility, what is moreimportant isthat even the broad-based 100-share National Index of the BSE too exhibited asimilarondary market described below. markphenomenon. The volatility was thehighest 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 8per 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 orclose-ended scheme

depending on its maturity period.

Open-ended Fund


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An open-ended Mutual fund is one that is available for subscription and repurchase on a continuousbasis. These Funds do not have a fixed maturity period. Investors can conveniently buy and sellunits at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature ofopen-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 forsubscription only during a specified period at the time of launch of the scheme. Investors can invest inthe scheme at the time of the initial public issue and thereafter they can buy or sell the units of thescheme on the stock exchanges where the units are listed. In order to provide an exit route to theinvestors, some close-ended funds give an option of selling back the units to the mutual fund throughperiodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exitroutes 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 itsinvestment objective. Such schemes may be open-ended or close-ended schemes as describedearlier. Such schemes may be classified mainly as follows:

Growth / Equity Oriented SchemeThe aim of growth funds is to provide capital appreciation over the medium to long- term. Suchschemes normally invest a major part of their corpus in equities. Such funds have comparatively highrisks. These schemes provide different options to the investors like dividend option, capitalappreciation, etc. and the investors may choose an option depending on their preferences. Theinvestors must indicate the option in the application form. The mutual funds also allow the investors tochange the options at a later date. Growth schemes are good for investors having a long-term outlookseeking 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 schemesgenerally invest in fixed income securities such as bonds, corporate debentures, Governmentsecurities 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 ofcapital appreciation are also limited in such funds. The NAVs of such funds are affected because ofchange in interest rates in the country. If the interest rates fall, NAVs of such funds are likely toincrease in the short run and vice versa. However, long term investors may not bother about thesefluctuations.

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes invest bothin equities and fixed income securities in the proportion indicated in their offer documents. These areappropriate for investors looking for moderate growth. They generally invest 40-60% in equity anddebt instruments. These funds are also affected because of fluctuations in share prices in the stockmarkets. 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 capitaland moderate income. These schemes invest exclusively in safer short-term instruments such astreasury bills, certificates of deposit, commercial paper and inter-bank call money, governmentsecurities, etc. Returns on these schemes fluctuate much less compared to other funds. These fundsare appropriate for corporate and individual investors as a means to park their surplus funds for shortperiods.

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 asis 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 50index (Nifty), etc These schemes invest in the securities in the same weightage comprising of anindex. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though


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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. moneymarket

Definition

Market for short-termdebt securities, such as banker's acceptances, commercial

paper, repos, negotiablecertificates ofdeposit, 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 lowinterest rate that is most

appropriate for temporary cashstorage or short-term time horizons. Bid and ask

spreads are relatively small due to the large size and highliquidity of the market.

Money MarketMutual 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.
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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 MarketWhen 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 companyborrows.

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.


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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. Someof 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 InstrumentsMoney Market: Money market means market where money or its equivalentcan be traded.Money is synonym of liquidity. Money market consists of financial institutionsand dealers inmoney or credit who wish to generate liquidity. It is better known as a placewhere large


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institutions and government manage their short term cash needs. For generationof liquidity, shortterm borrowing and lending is done by these financial institutions and dealers.Money Market ispart of financial market where instruments with high liquidity and very shortterm maturities aretraded. Due to highly liquid nature of securities and their short term maturities,money market istreated as a safe place. Hence, money market is a market where short termobligations such astreasury bills, commercial papers and bankers acceptances are bought and sold.Benefits and functions of Money Market: Money markets exist to facilitateefficient transfer ofshort-term funds between holders and borrowers of cash assets. For thelender/investor, itprovides a good return on their funds. For the borrower, it enables rapid andrelatively

inexpensive acquisition of cash to cover short-term liabilities. One of the primaryfunctions ofmoney market is to provide focal point for RBIs intervention for influencingliquidity andgeneral levels of interest rates in the economy. RBI being the main constituent inthe moneymarket aims at ensuring that liquidity and short term interest rates areconsistent with themonetary policy objectives.Money Market & Capital Market: Money Market is a place for short termlending andborrowing, typically within a year. It deals in short term debt financing and

investments. On theother hand, Capital Market refers to stock market, which refers to trading inshares and bonds ofcompanies on recognized stock exchanges. Individual players cannot invest inmoney market asthe value of investments is large, on the other hand, in capital market, anybodycan makeinvestments through a broker. Stock Market is associated with high risk and highreturn as againstmoney market which is more secure. Further, in case of money market, deals aretransacted on

phone or through electronic systems as against capital market where trading isthroughrecognized stock exchanges.Money Market Futures and Options: Active trading in money market futuresand optionsoccurs on number of commodity exchanges. They function in the similar mannerlike any otherfutures and options.Money Market Instruments: Investment in money market is done throughmoney marketinstruments. Money market instrument meets short term requirements of theborrowers and

provides liquidity to the lenders. Common Money Market Instruments are asfollows:


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T reasury Bills (T-Bills):Treasury Bills, one of the safest money marketinstruments, areshort term borrowing instruments of the Central Government of the Countryissued throughthe Central Bank (RBI in India). They are zero risk instruments, and hence the

returns are notso attractive. It is available both in primary market as well as secondary market.It is apromise to pay a said sum after a specified period. T-bills are short-termsecurities thatmature in one year or less from their issue date. They are issued with three-month, six-monthand one-year maturity periods. The Central Government issues T- Bills at a priceless thantheir face value (par value). They are issued with a promise to pay full face valueon maturity.So, when the T-Bills mature, the government pays the holder its face value. The

differencebetween the purchase price and the maturity value is the interest income earnedby thepurchaser of the instrument. T-Bills are issued through a bidding process atauctions. The bidcan be prepared either competitively or non-competitively. In the second type ofbidding,return required is not specified and the one determined at the auction isreceived on maturity.Whereas, in case of competitive bidding, the return required on maturity isspecified in thebid. In case the return specified is too high then the T-Bill might not be issued tothe bidder.At present, the Government of India issues three types of treasury bills throughauctions,namely, 91-day, 182-day and 364-day. There are no treasury bills issued byStateGovernments. Treasury bills are available for a minimum amount of Rs.25K andin itsmultiples. 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 ReserveBank of India

issues a quarterly calendar of T-bill auctions which is available at the Bankswebsite. It alsoannounces the exact dates of auction, the amount to be auctioned and paymentdates byissuing press releases prior to every auction. Payment by allottees at the auctionis required tobe made by debit to their/ custodians current account. T-bills auctions are heldon theNegotiated Dealing System (NDS) and the members electronically submit theirbids on thesystem. NDS is an electronic platform for facilitating dealing in GovernmentSecurities and

Money Market Instruments. RBI issues these instruments to absorb liquidity fromthe market


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by contracting the money supply. In banking terms, this is called ReverseRepurchase(Reverse Repo). On the other hand, when RBI purchases back these instrumentsat a specifieddate mentioned at the time of transaction, liquidity is infused in the market. Thisis calledRepo (Repurchase) transaction.

R epurchase Agreements: Repurchase transactions, called Repo or ReverseRepo aretransactions or short term loans in which two parties agree to sell andrepurchase the samesecurity. They are usually used for overnight borrowing. Repo/Reverse Repotransactions canbe done only between the parties approved by RBI and in RBI approvedsecurities viz. GOIand State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc.Under

repurchase agreement the seller sells specified securities with an agreement torepurchase thesame at a mutually decided future date and price. Similarly, the buyer purchasesthe securitieswith an agreement to resell the same to the seller on an agreed date at apredetermined price.Such a transaction is called a Repo when viewed from the perspective of theseller of thesecurities and Reverse Repo when viewed from the perspective of the buyer ofthe securities.

Thus, whether a given agreement is termed as a Repo or Reverse Repo dependson whichparty initiated the transaction. The lender or buyer in a Repo is entitled toreceivecompensation for use of funds provided to the counterparty. Effectively the sellerof thesecurity borrows money for a period of time (Repo period) at a particular rate ofinterestmutually agreed with the buyer of the security who has lent the funds to theseller. The rate ofinterest agreed upon is called the Repo rate. The Repo rate is negotiated by thecounterpartiesindependently of the coupon rate or rates of the underlying securities and is

influenced byoverall money market conditions.

C ommercial Papers: Commercial paper is a low-cost alternative to bankloans. It is a shortterm unsecured promissory note issued by corporates and financial institutionsat adiscounted value on face value. They are usually issued with fixed maturitybetween one to270 days and for financing of accounts receivables, inventories and meetingshort termliabilities. Say, for example, a company has receivables of Rs 1 lacs with creditperiod 6

months. It will not be able to liquidate its receivables before 6 months. Thecompany is in


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need of funds. It can issue commercial papers in form of unsecured promissorynotes atdiscount of 10% on face value of Rs 1 lacs to be matured after 6 months. Thecompany hasstrong credit rating and finds buyers easily. The company is able to liquidate itsreceivablesimmediately and the buyer is able to earn interest of Rs 10K over a period of 6months. Theyyield higher returns as compared to T-Bills as they are less secure in comparisonto thesebills; however chances of default are almost negligible but are not zero riskinstruments.Commercial paper being an instrument not backed by any collateral, only firmswith highquality credit ratings will find buyers easily without offering any substantialdiscounts. Theyare issued by corporates to impart flexibility in raising working capital resources

at marketdetermined rates. Commercial Papers are actively traded in the secondarymarket since theyare issued in the form of promissory notes and are freely transferable in dematform.

C ertificate of Deposit: It is a short term borrowing more like a bank termdeposit account. Itis a promissory note issued by a bank in form of a certificate entitling the bearerto receiveinterest. The certificate bears the maturity date, the fixed rate of interest and thevalue. It canbe issued in any denomination. They are stamped and transferred byendorsement. Its termgenerally ranges from three months to five years and restricts the holders towithdraw fundson demand. However, on payment of certain penalty the money can bewithdrawn on demandalso. The returns on certificate of deposits are higher than T-Bills because itassumes higherlevel of risk. While buying Certificate of Deposit, return method should be seen.Returns canbe based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). InAPY,

interest earned is based on compounded interest calculation. However, in APRmethod,simple interest calculation is done to generate the return. Accordingly, if theinterest is paidannually, equal return is generated by both APY and APR methods. However, ifinterest ispaid more than once in a year, it is beneficial to opt APY over APR.

B ankers Acceptance: It is a short term credit investment created by a nonfinancial firm andguaranteed by a bank to make payment. It is simply a bill of exchange drawn bya person andaccepted by a bank. It is a buyers promise to pay to the seller a certain specified

amount at


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certain date. The same is guaranteed by the banker of the buyer in exchange fora claim onthe goods as collateral. The person drawing the bill must have a good creditrating otherwisethe Bankers Acceptance will not be tradable. The most common term for theseinstrumentsis 90 days. However, they can very from 30 days to180 days. For corporations, itacts as anegotiable time draft for financing imports, exports and other transactions ingoods and ishighly useful when the credit worthiness of the foreign trade party is unknown.

The sellerneed not hold it until maturity and can sell off the same in secondary market atdiscount fromthe face value to liquidate its receivables.An individual player cannot invest in majority of the Money MarketInstruments, hence for

retail market, money market instruments are repackaged into MoneyMarket Funds. Amoney market fund is an investment fund that invests in low risk and low returnbucket ofsecurities viz money market instruments. It is like a mutual fund, except the factmutual fundscater to capital market and money market funds cater to money market. MoneyMarket funds canbe categorized as taxable funds or non taxable funds.Having understood, two modes of investment in money market viz DirectInvestment in MoneyMarket Instruments & Investment in Money Market Funds, lets move forward to

understandfunctioning of money market account.

Investment inMoney MarketDirect Investmentin Money MarketInstrumentsInvestment inMoney MarketFundsParking money in

Money MarketAccountMoney Market Account: It can be opened at any bank in the similar fashion asa savingsaccount. However, it is less liquid as compared to regular savings account. It is alow risk accountwhere the money parked by the investor is used by the bank for investing inmoney marketinstruments and interest is earned by the account holder for allowing bank tomake suchinvestment. Interest is usually compounded daily and paid monthly. There aretwo types of

money market accounts:


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Money Market Transactional Account: By opening such type of account, theaccountholder can enter into transactions also besides investments, although thenumbers oftransactions are limited. Money Market Investor Account: By opening such type of account, the accountholder can only do the investments with no transactions.Money Market Index:To decide how much and where to invest in moneymarket an investorwill refer to the Money Market Index. It provides information about the prevailingmarket rates.

There are various methods of identifying Money Market Index like: Smart Money Market Index- It is a composite index based on intra day pricepatternof the money market instruments. Salomon Smith Barneys World Money Market Index- Money marketinstruments are

evaluated in various world currencies and a weighted average is calculated. Thishelps in determining the index. Bankers Acceptance Rate- As discussed above, Bankers Acceptance is amoneymarket instrument. The prevailing market rate of this instrument i.e. the rate atwhichthe bankers acceptance is traded in secondary market, is also used as a moneymarket index. LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank OfferedRatealso serves as good money market index. This is the interest rate at which banksborrow funds from other banks.

By: Abhishikta Chadda, Associate Chartered Accountant, Membership No:

500597

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