Not only companies with large surpluses, but a few mid-caps, as well as small scale businesses, are increasingly investing their surpluses in mutual funds.
The Indian mutual fund industry has recorded exponential growth on the back of rising small business owners and retail investors’ interest in investing in mutual funds. According to the Association of Mutual Funds in India, The MF industry’s AUM has grown from Rs 15.8 trillion as of July 31, 2016, to Rs. 35.2 trillion as of July 31, 2021, which is a more than 2 fold increase in the time span of 5 years.
Are you also one of those small business owners who is looking for effective corporate investment options to invest idle cash? If yes, then mutual funds are the right choice according to the current market situation. Historically, corporates, as a part of cash-flow and business wealth management, invest 90% of their idle cash in short-term debt funds.
In this blog, we will be explaining why corporates should invest in mutual funds to assure you of your investment choice.
But, before jumping directly into why you should invest your idle sitting cash in mutual funds, let’s get a basic understanding of mutual funds.
Contents of the blog –
- What are mutual funds?
- Structure of Mutual Funds in India
- Why Corporates Should Invest in Mutual Funds?
- How Corporates Can Invest in Mutual Funds?
- Documents Required For Companies to Invest In Mutual Funds.
What are mutual funds?
The pool of money collected from a large number of people (or investors) is what makes up a Mutual Fund. The fund is managed by a professional money manager or fund manager, who collects money from investors and invests it in bonds, equities, money market instruments and other securities. The income or gains generated from this collective investment is distributed amongst the investors according to their proportionate share.
Through mutual funds, investors gain access to professionally managed folios of bonds, equities and other securities. Therefore, each investor or shareholder proportionally participates in the gain or loss of the fund. Mutual funds involve some risk, however, the returns are generally greater than in other investment plans like FD.
Structure of Mutual Funds in India
Mutual Funds incorporate three main entities – Sponsor, Trustee, AMC. These three entities are involved in setting and managing the fund according to the regulations defined by SEBI (Securities and Exchange Board of India).
Here is how these entities work-
A sponsor is a person or organization that creates the fund. The sponsor is held responsible for getting funds approved by SEBI.
Trust and Trustees:
After the sponsor gets approval from SEBI, they form a public trust as per the guidelines of The Indian Trust Act of 1882 and registered with SEBI. A trust then appoints members as trustees to manage the trust. These trustees are a crucial part of a mutual fund set up as they set up and manage an Asset Management Company (AMC) and are answerable to the investors.
Asset Management Company:
AMC hires an experienced fund manager who has all the necessary skills and knowledge to manage the mutual fund. The company also introduces various schemes to match the financial requirements of investors. Any scheme introduced by an Asset Management Company needs the approval of the trustees.
How do Mutual Funds invest their money and generate returns?
As mentioned above, mutual funds are a basket of various financial instruments that generate returns over a period of time. When an investor purchases a mutual fund, he or she buys the units of the mutual fund scheme depending on the Net Asset Value (NAV) of that fund on the day the transaction is performed.
The fund manager invests the collected funds in high-returning financial instruments such as arbitrage, debt instruments, equity stocks, derivatives etc to generate returns for the investors. The total gains from these allocations get added to various assets that are managed under the fund, on which the NAV of the fund depends.
The investors can redeem the fund units according to their convenience. The units are redeemed as per the current NAV of the fund which is probably higher than the NAV at which investors purchased the units. If the NAV at the time of redemption is not substantially higher than the invested NAV, it is suggested to remain invested and wait for the market to rise.
Why Corporates Should Invest in Mutual Funds?
Most of the startup builders and small business owners suffer from a shortage of finances, which hampers the smooth functioning of the organization. Therefore it is suggested that small business owners should not just make their ends meet, but also try and aim at building their business wealth, which helps in sustaining the business during volatile periods.
You cannot always depend on banks for loans to upgrade the operations or to prevent your business from collapsing. Although it is not always possible to single-handedly manage all the expenses, it is always advisable to have a backup corpus on which you can rely when needed. Building a backup corpus through corporate investment options also makes you survive pandemic and economic downturns. The best way to build this corpus is to start investing in mutual funds investment for corporates, here is why:
1. To Diversify business’s wealth in other businesses:
Let’s understand this by an example. Suppose you are an owner of a mid-cap marketing company and your business is doing well due to the desired results you are offering to clients. And, you are very confident that you will be able to grow your business with your profound knowledge and experience.
But, is your business prepared for abrupt economic downturns like the one brought by the current COVID19 pandemic? In addition, changes in government regulations, fierce competition, changing customers’ preferences may create adverse conditions for a smoothly running business. It is, therefore, crucial to have a diversified business so that crises in one business can be supported by other businesses.
However, it is not always possible to learn about new businesses, invest capital and create a team, especially when your one business is still in a growing phase. But by investing in mutual funds, corporates can put their surplus cash in financial instruments that are already growing. Hence, by investing in mutual funds like equity funds corporate owners can diversify their business’ wealth in other businesses which they may not otherwise be able to start on.
2. To Leverage market opportunities:
Many times you hear news like, “IT companies are making huge profits, online delivery services are growing, e-commerce businesses are thriving”. What it means is that demand for these types of services is high in the market and they are going to make huge profits in the coming future. Despite knowing this, you cannot shift your domain and start new in-demand services. Also, despite knowing that real estate is expected to bring high returns, not every business owner can start his own infrastructure/engineering/real estate firm to benefit from this opportunity.
Equity mutual funds are highly preferred corporate investment options that business owners can leverage market opportunities without actually getting into these expected-to-grow businesses.
3. To Grow your business wealth:
Business wealth management is not just keeping tabs on the cash flow position, but it also involves investment options that grow your business wealth. On average, you can make 5% returns by investing in mutual funds over weekends and holidays. Imagine, how much you can earn as capital gains by investing your surplus over a longer period of time.
Investing your idle cash in mutual funds not only brings you attractive returns but also makes your balance sheet stronger. Moreover, you can save taxes on your long term mutual fund gains through tax harvesting. All in all, investing your idle sitting cash in mutual funds is the best way to grow your business’s wealth.
4. To achieve your business’s goal:
To grow and sustain the cutting edge competition, it is crucial for every business to expand, upgrade technology, add new services, launch new products, hire new resources and enhance the workplace infrastructure. All this requires a substantial amount of capital, which you might or might not be able to manage from your profits.
By investing in mutual funds, corporates can generate profits outside their business, which will prepare them for their business goals financially.
In a nutshell, corporate investments can prevent your business from volatile situations and prepare your business for future goals financially. Investing in mutual funds helps business owners diversifying their business, participate in profitable opportunities available in the market, grow business idle’s cash and achieve business’s goals.
Track, Manage and Grow Your Business Wealth With Shootih
Shootih is India’s first business wealth management tool that enables corporates to get a consolidated, analytical view of all their business transactions, and invest the idle business cash smartly in mutual funds with the aid of AI-based investment recommendations, through the same platform. Shootih offers you both business cash flow management and access to buy/sell mutual funds through the same platform.
Here are the key features of Shootih:
- Monitors cash flow across multiple accounts and portfolios.
- Provides investment options for a business’s idle cash through AI-based recommendations.
- Offers mutual funds investment options best-suited for corporates investments.
- Reduces your tax liability.
- Tracks corporate goals.
Our main aim is to provide businesses with one tool for everything – from business cash flow management to forecasting the expenses, investment through various investment instruments, tax harvesting, and goal tracking. Thus, enabling CEOs, Founders and CFOs to drive impactful business decisions based on AI-based recommendations and increase their profits by buying/selling mutual funds through the same platform. Feel free to reach out to learn more about the best-suited mutual fund for your corporate investments.
In case you wish to overcome your business wealth management challenges, book a free demo with us and see how Shootih can make your life easy!