What is a money market? It is a regulated exchange in which those who participate can lend or borrow money in large amounts, usually for a year or less.
It has all sorts of participants – governments, businesses, banks and other large institutions. It is also built to accommodate individuals who may want to invest smaller amounts of money. It offers them liquidity and safety, because it tends to be rather stable. This is where the concept of a best money market comes in: you want to invest in the most stable and high yield money market that you can find. The fact that it has successfully invested funds for over 35 years is used as the measure of success.
You will find different instruments in a money market. There will be treasury bills, commercial paper, and others, depending on the particular money market.
Why Money Markets?
If you have an excess amount of money that you are not currently using, you can invest it temporarily. Holding funds in cash is risky, and it has an opportunity cost because if you were to invest it, you would be able to get a yield on it. Banks as well do not compare – the yield is much lower with your money sitting in a savings account in the bank than it would be were you to invest it in a money market.
Governments and businesses also go to money markets for much the same reason. They either have an excess of cash that they can quickly multiply, or they need to borrow. It is in the interest of all participants, big and small, that the money market they choose has a reputation of bringing back the best yields – they will all tend towards the best money market.
How do you choose the best money market?
The cash and credit crisis that rocked the world recently shows that it’s very important to put careful consideration into choosing a money market. All money markets are governed by a regulatory body, but this does not mean that they cannot be rocked by financial and economic crisis. If you want to get into the best money market, consider the following:
1. While it is true that the higher the risk the higher the return, you may be one of those individuals who are risk averse. If you are, you will want to choose a money market fund that invests in government backed securities. These, though of lower interest naturally, will offer greater security.
2. If you are more adventurous and are willing to take higher risks, then look at a wider range of instruments. If you want to know if an instrument is high risk, look at the rate of return.
3. There are purchased and sweep funds on any money market, and they are different. Purchased funds will have a minimum investment amount and can only be cashed in a day after request. On the other hand, sweep funds allow you to cash in on the same day that you request.
4. Look at the amount of fees that you have to pay, depending on the instrument that you buy. It should compare favorably to the interest or yield. Sweep funds also come at a higher cost because of the advantage of being able to cash them in the same day.
5. Do you want to make an investment in a security that is tax exempt? That is also another consideration, because although these are highly stable and risk averse, they tend to offer much lower yield.
6. Of course your knowledge of the market is another thing to think about. You want to go into a money market which you are at least familiar with. For many, an investor comes in handy here, even though you will have to pay them from your interest profits.
These are the most important considerations to make before you invest in the money market. It can be a complicated, so look for a professional investor with a good reputation to help you choose the best money market.