Money Market Instruments
Also written Money market securities · Money market instrument
Debt instruments with maturity of one year or less. Under the PM Regulations they include commercial paper, trade bills, treasury bills, certificates of deposit and usance bills.
In plain language
The money market is where short-term borrowing and lending happens — one year or less.
A company that needs cash for three months issues commercial paper. The government borrowing for 91 days issues a treasury bill. A bank raising short-term funds issues a certificate of deposit. All of these are money market instruments.
For a PMS investor they matter for two reasons. They are where a portfolio holds its liquidity — the cash-like portion that meets withdrawals and waits for opportunities. And they are one of the few asset types the SEBI Portfolio Managers Regulations name explicitly when saying what a discretionary portfolio manager may invest in.
How it works
Definition by maturity (Chapter 4). Bonds with maturity of a year or less are money market securities; those above a year are capital market securities. A long-term bond becomes a money market security as it nears maturity.
Definition by regulation (Chapter 12). A discretionary portfolio manager invests client funds in securities listed or traded on a recognised stock exchange, money market instruments, units of mutual funds and other securities specified by SEBI. The regulation's footnote: "Money market instruments" includes commercial paper, trade bill, treasury bills, certificate of deposit and usance bills.
Conventions and ratings.
| Feature | Money market | Bond market (India) |
|---|---|---|
| Day count convention | Actual/365 | 30/360 |
| Rating scale | Short-term: A1, A2, A3, A4, D (modifier "+" allowed A1–A4) | Long-term: AAA to D |
| Scale applies to | Original maturity up to one year | Original maturity exceeding one year |
Liquidity. Chapter 1 says Treasury bills have no liquidity risk: they can be sold in a fraction of a minute at a price worth their economic value.
Valuation in PMS (Chapter 10). APMI prescribes standardised valuation norms, and portfolio managers must value debt and money market securities using services only from one or more APMI-empanelled valuation agencies. The ultimate responsibility for fair valuation stays with the portfolio manager.
A worked example
Illustrative amounts; the day count conventions are the workbook's.
A discretionary portfolio manager holds ₹5 lakh of a client's ₹75 lakh PMS portfolio in money market instruments, awaiting deployment.
| Instrument | Amount | Rating scale used |
|---|---|---|
| 91-day Treasury bill | ₹2,00,000 | Sovereign |
| 3-month certificate of deposit | ₹1,50,000 | Short-term (e.g. A1+) |
| 6-month commercial paper | ₹1,50,000 | Short-term (e.g. A1) |
Accrued interest under actual/365. Suppose ₹10 lakh of a money market instrument earns 7% and is held from 1 January to 1 March 2027 — 59 actual days.
₹10,00,000 × 7% × 59/365 = ₹11,315.07
Had the bond-market 30/360 convention been used, the same period would count as 60 days: ₹10,00,000 × 7% × 60/360 = ₹11,666.67. The ₹351.60 difference is why Chapter 4 says all participants in a market should follow one uniform convention.
At month-end the portfolio manager values the CD and CP not from its own model but using prices from an APMI-empanelled valuation agency.
Why NISM asks about it
Chapter 4 (maturity cut-off, day count convention, short-term rating symbols), Chapter 10, section 10.6 (APMI valuation norms for debt and money market securities) and Chapter 12, section 12.4.2 (the regulatory definition and the discretionary portfolio manager's permitted investments). The footnote list — commercial paper, trade bill, treasury bills, certificate of deposit, usance bills — is a natural "which of the following is not" question.
Common exam traps
- One year or less. Exactly one year is money market; the short-term rating scale covers instruments with original maturity up to one year.
- Actual/365 for money market; 30/360 for Indian bonds. T-bills follow the money market convention.
- The PM Regulations list five instruments: commercial paper, trade bill, treasury bills, certificate of deposit, usance bills. Equity shares, debentures and mutual fund units are not in the list.
- Short-term ratings run A1 to A4 and D; long-term run AAA to D. "+" modifiers apply to A1–A4 short-term and AA–C long-term.
- Empanelled agencies are mandatory for valuing debt and money market securities — but responsibility for fair valuation remains with the portfolio manager.
- Permitted for discretionary portfolio managers by name. Unlisted securities are a separate allowance: up to 25% of AUM for non-discretionary or advisory clients, and up to 100% for large value accredited investors (Chapter 12).
Where this is taught
- Series XXI-B · Chapter 11: Regulatory, Governance and Ethical Aspects of Portfolio Managersintroduced here
- Series XIX-C · Chapter 2: Types of Investmentsintroduced here
- Series XIX-E · Chapter 2: Types of Investmentsintroduced here
- Series XXI-A · Chapter 12: Regulatory, Governance and Ethical Aspects of Portfolio Managersintroduced here
- Series XIX-D · Chapter 2: Types of Investmentsintroduced here
Related terms
- Credit ratingAn opinion on how likely a borrower is to service an instrument on time, reduced to a symbol by a SEBI-registered rating agency — and reviewed continuously, not fixed for the life of the bond.
- Liquidity riskThe risk of being unable to get out of a position at or near the quoted price — because the contract is bilateral, because the order book is thin, or because volumes dry up near expiry.
- APMIThe Association of Portfolio Managers in India — the PMS industry body that prescribes benchmarks and valuation norms, standardises client documents and registers PMS distributors.
- Fixed income securityA debt instrument under which the issuer promises a fixed coupon at regular intervals and repayment of the face value at maturity — government bonds, corporate bonds, debentures and T-bills.
- Day count conventionThe rule for counting days in a holding period to calculate accrued interest. Indian bonds use 30/360; the Indian money market, including T-bills, uses actual/365.
- Capital PreservationAn investment objective of minimising or avoiding any erosion of the principal. Pursued by highly risk-averse investors and by anyone who needs the money in the immediate short term.
- Volume Weighted Average YieldThe average yield of a debt security's trades, weighted by traded volume. Category III AIFs value T-bills and G-Secs on the VWAY of the last hour's trades, and other debt on the whole day's trades.
- Term PremiumThe extra return investors demand for lending long rather than short, because a longer horizon means more uncertainty about future cash flows than money market paper of one year or less.
- Deep Discount BondA zero-coupon bond of very long tenure, issued at a steep discount to its face value and redeemed at par. IDBI issued such bonds; the Kisan Vikas Patra is another example.
- Debt capitalMoney a company borrows — through debentures, bonds, commercial paper or bank loans — which must pay interest and be repaid on maturity, whether or not the company is doing well.
- Financial systemThe whole set of institutional arrangements that move funds from surplus units (households) to deficit units (companies and governments) — made up of financial markets, instruments and intermediaries.
- Capital marketThe market in which companies and governments raise long-term funds — for periods longer than a year — through shares and bonds, together with the secondary market where those securities later trade.
- Financial marketThe market in which financial assets such as equities, bonds, currencies and derivatives are created or transferred — a mechanism for dealing in financial securities and commodities at low cost.
- DebentureIn Indian usage, a long-term debt instrument issued by a company, bank or financial institution — as opposed to a bond, the term reserved for debt issued by a government or its undertakings.
- Empanelled valuation agencyA valuation agency approved by APMI from whose panel every portfolio manager must mandatorily source debt and money market security prices, though the manager still bears ultimate responsibility for fair valuation.
- Certificate of DepositA negotiable, unsecured money market instrument issued by a bank against funds deposited with it, sold at a discount and repaid at face value within one year.
- Commercial PaperA short-term, unsecured, discounted money market instrument through which eligible companies raise funds for 7 days to one year, issued in Rs 5 lakh multiples.
- Triparty repoA repo in which a third party, the Triparty Agent, handles collateral selection, payment and settlement, custody and management between borrower and lender.
- Call moneyUncollateralised overnight lending and borrowing of funds between scheduled commercial banks and primary dealers — the shortest segment of the Indian money market.
- Government SecurityA tradeable debt instrument issued by the Central Government or a State Government — treated as free of default risk, and the benchmark against which other rupee interest rates are priced.