Even in these tough times (and more so in the better times) many companies are often left with surplus funds in their accounts. These funds are often not leveraged to increase the company’s rate of return. In this article, we have tried to give you a guide to doing so right from the basic approach one should take, to the various options available. But be assured, whether you are a retail investor with a small surplus or a corporate with large surplus there are a number of avenues to park surplus funds.

First let us focus on the approach. Whether small or large, short-term or long-term, investment decisions ought to be taken in terms of clear goals and not on an adhoc basis. Another thing that needs to be done before taking any investment decision is to arrive at a consensus on the risk level and approach to risk from all the key decision makers in the company. Once you are ready, then identify your investment need; assess the risk you can take and the duration for which you can park the surplus.

Now let us move onto the options available with respect to short term parking of funds ie. Funds being parked for a period ranging from a few days to about a year. Some of them would be as follows:

Fixed Deposits:

These are available through banks, manufacturing companies and financial institutions. Their tenure ranges from 30 days to 3 years and above. The rates offered by banks vary according to the maturity of the deposit. The interest rates offered by banks today are in the range of 6% to 9%. One need to also keep one factor in mind that there is a Tax deducted at source on the interest paid. Hence the post tax returns drastically reduce.

Mutual Funds:

Mutual funds are a way for many people today to put their money together and have it managed by investment professionals. Thus A mutual fund is a trust that pools the money of several investors and manages investments on their behalf. There are various schemes by mutual funds companies today where an investor can park his/her surplus. Each scheme is differentiated by its objective of investment or in other words, a broadly defined purpose of how the collected money is going to be invested. Based on these broad purposes, schemes are classified into dozen or so categories. But for case of understanding we could classify funds into Equity funds, Income funds and Balanced funds.

When it comes to short-term investments Debt funds are what an investor should look into. Debt funds invest primarily in treasury bills, bonds and corporate apart from Government securities. Debt Funds can be further categorized into:

Liquid or Money market:

Money market schemes invest in sort-term debt instruments such as T-bills, certificates of deposits, commercial papers, call money markets, etc. Their goal is to preserve the principal while yielding a modest return. They are ideal for corporate and big investors looking for avenues to park their sort-term surplus funds.

Since they provide the investor to enter or exit within a short period of time without any load. Normally, you can get back your cash within 24 hours of redemption. All liquid schemes are open-ended.

Gilt schemes:

Gilt schemes invest in government bonds, money market securities or some combination of these. They tend to give a higher return. They are slightly volatile because 95% of the traded volume of fixed income instruments in India comprise of gilt’s. These funds have little risk of default and hence offer better protection of capital.

Income schemes:

Besides investing in Government of India securities and money market instruments, they are slightly more overweighed on corporate India. Approximately 50-60% of the portfolio would consist of fixed income instruments issue by corporate India.

Monthly Income Plan (MIP):

A variant of the income scheme, they generally provide investors an option to get monthly returns in the form of dividends. UTI is the only fund house giving out assured returns of MIP (distributed as post-dated cheques). Private sector mutual funds are not allowed to give assured returns on MIPs.

Let us quickly cover the relevant tax issues:

Now that you are aware of the options, there are two ways of going about the investment process. The first is to have someone from the company contact the Banks / Mutual fund companies directly and make the investment. The second and increasingly preferred route is to avail services of financial planners and investment advisory houses like Investsmart, Karvy, Way2Wealth etc. who have qualified and experienced financial and investment planners.

Happy parking your surplus funds.

(The article was written based on inputs provided by Tarun Kumar Singh of Birla Sun Life Mutual Fund.)

Issue BG10 Jan02