Money market vs Capital market: Key Differences to be Aware of
The money market and capital market are two vital components of the Indian financial system. While the money market fulfils short-term liquidity needs, the capital market offers a long-term investing platform. Though they may look the same at first glance, there are several differences between the money market and capital market. What are these? Let's find out.
What is a money market?
The money market belongs to short-term, liquid securities. This market caters to the economy's cash requirement and helps mobilise funds for different sectors. This market is also called the cash or discount market. Key players in the money market include:
- The Reserve Bank of India (RBI)
- Non-banking financial companies
- Mutual fund houses
- All India Financial Institutions
Other players in the money market are informal and unregulated entities that may include lenders and indigenous bankers, among others, who offer short-term finance to borrowers. Some examples of money market instruments are:
- Treasury bills
- Commercial papers
- Certificate of deposits
- Repurchase agreements
- Call and notice money
What is a capital market?
Capital markets are financial markets for long-term investments. Long-term financial assets are traded in capital markets, which are also called securities or investment markets. Highly regulated, investing in capital markets can help you build a corpus for various long and short-term goals. Securities of capital markets include:
- Equities
- Debt securities
- Exchange-traded funds
- Derivatives
Money market vs capital market: Key differences
The table captures key differences between money market and capital market on various parameters:
| Parameters | Money market | Capital market |
|---|---|---|
Function and purpose | For short-term credit facilities | For long-term credit facilities |
Liquidity | Highly liquid | Less liquid than money markets |
Maturity tenure | Between 1 day and 1 year | No particular time period as such |
Risk involved | Low | High |
Investment duration | Short-term | Long-term |
Returns | Consistent | Market-linked |
Money market or capital market: Your Pick
While choosing between money market and capital markets, keep in mind the following things:
-
Investment horizon
Go for money markets if you have a short-term investment horizon within a year. On the other hand, capital markets are ideal if you have a long-term investment horizon.
-
Liquidity needs
If you need quick access to money, opt for money markets. However, if you are looking to build wealth over the long term for goals like retirement, children’s education, etc., you can choose capital markets.
-
Risk tolerance
If you have a low-risk tolerance, go for money markets. On the other hand, if you have a high-risk appetite and can stomach market volatility, you can go for capital markets.
Wrapping it up
Understanding the key differences between the money market and capital market is crucial to making the right choice. That said, irrespective of investment in either, do your homework well and ensure your choice aligns with your financial goals.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
