Aditya Birla Sun Life Asset Management Company LTD.

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Debt Fund Investment For SME

  • Dec 10, 2018

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.

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