Money Market vs Capital Market
The Financial Market is a marketplace where buyers and sellers trade assets. It is divided into two main parts based on Time:
- Money Market (Short Term < 1 Year)
- Capital Market (Long Term > 1 Year)
1. Money Market (The Sprint)
This is a market for short-term funds.
- Duration: Overnight to 1 Year.
- Purpose: To manage liquidity (cash flow) needs.
- Players: RBI, Banks, Big Corporates, Government. (Retail investors rarely participate directly).
- Risk: Very Low.
- Liquidity: Very High.
Instruments:
- Treasury Bills (T-Bills): Issued by Govt for 91, 182, 364 days.
- Commercial Paper (CP): Issued by companies to meet short-term needs.
- Call Money: Banks lending to each other for 1 day.
2. Capital Market (The Marathon)
This is a market for long-term funds.
- Duration: More than 1 Year (often decades).
- Purpose: Wealth creation, Capital formation (building factories, infrastructure).
- Players: Retail Investors (You), Mutual Funds, FIIs, Companies.
- Risk: Moderate to High.
- Liquidity: High (for stocks), Low (for real estate).
Types of Capital Market:
- Primary Market: New securities issued (IPO).
- Secondary Market: Existing securities traded (Stock Exchange).
Instruments:
- Shares (Equity): Ownership in companies.
- Bonds (Debentures): Long-term loans to companies/govt.
Comparison Table
| Feature | Money Market | Capital Market |
|---|---|---|
| Time Horizon | Short Term (less than 1 Year) | Long Term (more than 1 Year) |
| Risk | Low | High |
| Return | Low (4-7%) | High (10-15% potential) |
| Instruments | T-Bills, CDs, CPs | Stocks, Bonds, Mutual Funds |
| Regulator | RBI | SEBI |
| Who Invests? | Banks, Corporates | Everyone |
Why Should You Care?
- Savings Account / Liquid Funds: Invest in Money Market. Safe, low return.
- Equity Mutual Funds / Stocks: Invest in Capital Market. Volatile, high return.
Asset Allocation is basically deciding how much to put in Money Market (Safety) vs Capital Market (Growth).
7-Day Action Plan
Day 1: Check your "Liquid Fund" portfolio. It invests in Money Market instruments.
Day 2: Read about "T-Bills" on RBI Retail Direct website.
Day 3: Check the yield (return) of a 91-day T-Bill vs a 10-year Govt Bond.
Day 4: Understand why Money Market rates are close to the Repo Rate.
Day 5: Identify which part of your portfolio is "Capital Market" (Stocks, Equity MFs).
Day 6: Read about the "Call Money Market" (where banks borrow from each other).
Day 7: Decide your split: X% in Money Market (Emergency Fund) + Y% in Capital Market (Wealth).
Quiz
Test Your Knowledge
Question 1 of 5
1. Money Market deals with funds for a period of:
💡 Final Wisdom: Money Market keeps you safe. Capital Market makes you rich. You need both.