Yes, you can do better than letting your money sleep in a current account

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.

Welcome to Jaanoge Tabhi Toh Maanoge – a Birla Sun Life Mutual Fund Initiative.

To empower you with knowledge on Mutual Funds, this website presents you with Informative and Interactive tools. As you explore the site, you will come across informative infographics which empower you with knowledge on various facets of mutual funds, and interactive tools like Ask a Question, Mutual Fund quiz, etc. which answers your queries, test your knowledge, and much more.

Before you delve into the world of Mutual Funds, have quick read on the basics.

When does mutual fund come into play in your life? It is the moment you are ready to achieve following in your life: Create wealth from your investments, achieve various financial goals in your life and/or save tax.

Before you start investing in mutual fund, you should answer two questions: What is the objective (goal) you want your money to achieve for you? And how long can you keep your money aside to grow?

For achieving short term goals like buying a car, going on a family vacation etc. you can invest in debt funds. For achieving long term goals like child's marriage, retirement etc. you can invest in equity funds.

So if you want to achieve a goal, say child's education, in 2 years, then your investment should be in debt schemes (2 days - 4 years). If you want to achieve this goal in next 10 years, then your investment should be in equity schemes (5 years+).

You are just a step away from planning for your financial freedom. Click here to learn and explore on Jaanoge Tabhi Toh Maanoge!

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