Seasonal variation of business operations

Credit cushion for (re)-payments

Working capital management

Surplus cash

Liquidity is available, though for varied tenures

Earning a return on this surplus adds to the surplus itself.

However, its mostly short term (15 days - 1 year).

Safety is important

Any investment should be easy to liquidate at a short notice

Fixed Deposits

Debt funds – Liquid/Ultra short term funds

Short term debt funds

Fixed Maturity Plans

Duration based debt products/MIP’s

Structured notes/Equities

Bonds

Products that can help take advantage of current market environment and deliver superior risk-adjusted returns

Superior post tax returns

Adequate liquidity at all times

Important to gauge 3 factors ◦ Time horizon – the time period for investments

◦ Liquidity - when the cash flows are required

◦ Volatility/ Risk – For higher time horizon, can this be tolerated?

Fund Focus Horizon

Liquid

Invest money in very short-term market instruments such as treasury bills, government securities and call money that hold least amount of risk. These funds can invest in instruments up to a maturity of 91 days. The maturity is mostly much lower than that Anytime

Ultra Short Term can invest in short-term instruments that have a maturity of over three months. These instruments may also be traded in the market. 1-2 months

Short Term

They invest in fixed income securities such as call money, certificate of deposits (CD), commercial papers (CP), money market instruments, corporate bonds, debentures of companies, securities issued by Government of India and Pass-Through-Certificates (PTCs).

3 months upto a year

Long Term income They invest in fixed income securities at the longer-end of the yield curve such corporate bonds, debentures of companies, securities issued by Government of India and Pass-Through-Certificates (PTCs). >1.5 yrs

FMP

Invest in fixed income instruments, like CD/CP, corporate bonds and debentures of companies. The FMP seeks to invest only in such securities that match the tenure of the FMP itself. By doing so, the FMP is able to hold these securities right up to the maturity of the plan itself, and does not need to trade in these instruments. These fixed income securities have a defined coupon rate and a defined period of maturity.

Tenure of FMP

Corporate Bond Focuses on corporate bonds and does not invest in G-secs 30 months and above >2 yrs

Gilt Pure gilt portfolio with relatively long maturity 1 year and above > 2 yrs

Market Linked Debentures

Monthly Income Plans

Equity oriented mutual funds

Bonds

With Indexation

FD Debt Fund

Investment (Rs) 1000 1000

Assumed Return (%) 7.5 7.5

Inflation (%) 5 5

Cost of Purchase (Rs) 1000 1050

Fund Value(Rs) 1075 1075

Capital Gains(Rs) 75 25

Interest Tax@30% + surcharge and education cess VS Capital gains tax of 20% 22.5 5

Post tax gains(Rs) 52.5 70

Without Indexation

FD Debt Fund

Investment (Rs) 1000 1000

Assumed Return (%) 7.5 7.5

Fund Value(Rs) 1075 1075

Capital Gains(Rs) 75 75

Interest Tax@30% + surcharge and education cess VS Capital gains tax of 10% 22.5 7.5

Post tax gains(Rs) 52.5 67.5

Variety of options available for liquidity management

In the current interest rate scenario, debt funds have an edge.

If horizon is more than a year, effective returns are higher due to better taxation.