1.12 Short Term Financial Instruments

Short-Term Financial Instruments

Money Market Instruments

These are specialised forms of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then aim to maximize returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. For example, treasury bills, commercial papers, certificate of deposits, bills discounting (see reference for more details).

Equity Trading

Another most popular high-risk and high-return investment option available to investors is by way of investing in shares of companies. Equity investment has the potential to yield high returns but also has equivalent risks. However, it is a time-tested theory that investing judiciously for a long-term in well-known companies always provides better returns and lowers the risk element.

Derivatives Trading

Derivatives are financial contracts or financial instruments whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset, as for example, commodities, equities (stocks) etc. The main types of derivatives are forwards, which if traded on an exchange are known as futures, options and swaps. We shall cover these in a separate chapter in detail. Each of the above non-traditional or innovative and short-term financial instruments are discussed individually in a detailed manner in the later chapters.

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