Making Your Money Work For You

If you have raised private equity, it usually is for executing the plan over a period of 12 to 18 months, unless the fund raise is to acquire another entity/business. While deployment is over a period of time, where would you park the money till the time it is deployed?

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The safest option, that many young entrepreneurs choose, is fixed deposits in the bank. The return is about 6 to 8.5% per annum as pre-tax. Post tax of 30% (or 33% as may be applicable), the return is much lesser.

Mutual funds are an alternative. Equity based mutual funds are risky and not advisable, because the entrepreneur needs the money for executing the business plan. Debt based funds are less riskier and can be explored as an option.

India has about Rs. 12 lakh crores of which about Rs. 9 lakh crore is in debt based funds, essentially 80% is invested by banks, insurance companies and to a smaller extent, corporates.

Liquid funds provide about 8% pre-tax, however, some Liquid Plus funds provide about 9 to 9.5% per annum as pre-tax returns. Liquid Plus is usually placed with other banks, commercial paper, non-convertible debentures, certificate of deposits, which makes these funds relatively less risky, but also earns, perhaps, lesser than equity based mutual funds in a buoyant market.

Bankers may not actively advise about Liquid Plus funds, because they earn income from the money parked in the savings or current account.

Fixed deposit has to be kept for a minimum of 15 days with the bank, on the other hand, Liquid Funds do not have minimum period and earns interest even for one day. Think of your money earning for you over the weekend. 🙂

Running a startup will need all the time and energy and may not leave time for fund management. There is an easier way of doing this. One can provide a mandate to the bank, to sweep the money beyond a limit, into Liquid Funds, i.e. essentially, this can be automated for the entrepreneur.

Some of the traditional businesses (which work on ‘profits’) can choose investment in liquid funds for parking their float.

Disclaimer: This is just sharing of knowledge. Please exercise your judgment and take professional advice before you act on this.

Some of the information provided is generalized and not accurate, to make the article an easy read.

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