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Here is a quiz question. Rishi Karmakar, a 35-year old owner of a manufacturing unit in Pune, needs to spend on machinery upgradation related expenses worth Rs 10 lakh over the next one year. Where should he be keeping his money? Some of us would scoff at the “no-brainer” question and would point out to a bank current account. Sure, a bank current account is perhaps the most obvious and popular destination to park cash for small and medium enterprises (SMEs), but is it the smartest one? Let’s take a close look. Unlike, large companies where specialised and experienced finance professionals anticipate and manage cash needs, SMEs don’t enjoy this luxury. The result: cash pile up in the bank current account. Now, cash is the lifeblood of every business but given their size, operations in SMEs are particularly vulnerable to any disruptions in cash flows. For banks, this is a bonanza since they typically pay no interest on current account, compared to 4 per cent for saving accounts. This money is then lent to borrowers at 9 per cent and above depending upon the type of loan. So, while a bank loan of Rs 10 lakh by the bank will earn for it Rs 90,000 in the first year, a person like poor Rishi Karmakar gets nothing. That doesn’t sound too great, does it?
Enter ultra-short term funds
The good news is that SMEs have an earning option for their cash that typically vegetates in a current account. The alternative is present in the form of ultra-short term funds from mutual funds. They are an ideal cash management tool for SMEs to manage their cash since they neither have a lock-in period nor an exit load. Along with the advantage of high liquidity they typically provide higher returns of 8-9 per cent on an annualised basis. The good news is that SMEs have an earning option for their cash that typically vegetates in a current account. The alternative is present in the form of ultra-short term funds from mutual funds. They are an ideal cash management tool for SMEs to manage their cash since they neither have a lock-in period nor an exit load. Along with the advantage of high liquidity they typically provide higher returns of 8-9 per cent on an annualised basis.
How they work
Ultra short term funds invest in money market securities. These are basically short-term debt securities like certificate of deposits, treasury bills and commercial papers which have very good credit profile and can easily be liquidated in the market. The investors can also redeem their investments in a day’s time.
Where to invest
Among Ultra short term funds, it combines stability liquidity with competitive returns among its peers. All this is topped up with ease of operation at low cost with no penalties or withdrawal charges.
Investing in small business is an important aspect of operating a successful business as it paves a pathway for sustainable growth. The cash or the profits you derive from the business is earned; hence it should be reinvested in order to ensure business growth so that it can lead to increased profits and so on.
When you’re running a small and medium enterprise and making a good amount of money, the biggest challenge as a business owner would be what to do about the profits? Generally, when you ask someone for parking excess cash for SMEs, most often people may recommend opening a current bank account. But is it still a smartest one to park your cash or profits? Well, probably no!
You may have myriad investment options to reinvest your business earnings, one of the ways you can gain steady growth returns is by opting for debt fund investment for small and medium-sized enterprises. They are an ideal cash management tool for SMEs to manage their cash since they neither have a lock-in period nor an exit load. Along with the advantage of high liquidity, they typically provide higher returns of 8-9 per cent on an annualized basis.
Ultra short-term debt funds invest in fixed income securities such as money market instruments and debt funds. As per the SEBI regulation, the Macaulay duration of such fund ranges between three to six months. Unlike equities, the funds are least affected by the interest rate movement.
Below are some of the reasons how Ultra short-term debt funds can be a lucrative investment option for SME:
The ultra-short-term fund has no exit load
If you’re looking for low-risk investment for short-term, this is a suitable option for short-term goals
As compared to liquid mutual funds, ultra short-term debt funds offer better returns
It has a low-interest rate risk against the other debt funds
You get sufficient liquidity option across all interest rate cycles
It focuses on generating accrual returns by holding the investment portfolio until maturity
As an SME owner, if you are looking to reinvest the profits in ultra short-term funds, you can opt for Aditya Birla Sun Life Savings Fund. The fund invests in assets that consistently generate superior yields at low risk.
