The role of liquid funds in business cash management: Growing to Rs. 5 crores

Effective cash management is crucial for businesses to operate smoothly and maximise growth. Liquid mutual funds can play a strategic role, especially for high-growth companies aiming to scale up to Rs. 5 crores and beyond. Their features make liquid funds a versatile cash management tool for businesses in India.

Liquid funds provide optimal returns on surplus cash

Liquid funds invest in money market and short-term debt instruments with maturity up to 91 days. They provide higher returns of 4-6% compared to savings accounts while providing easy liquidity. Liquid funds are ideal for parking surplus cash earmarked for short-term needs and emergencies. The returns compound the operating capital allowing optimal utilization of excess cash. Systematic withdrawal plans (SWPs) allow regular income from liquid funds.

Align liquid funds with business operating cycles  

Businesses have cyclical inflows and outflows. Liquid funds can be aligned with operating cycles for efficient cash management. Funds can be parked for durations congruent with cycles to take advantage of optimal returns. For example, inventory purchases recurring every quarter can be funded by redeeming from liquid funds where surplus cash was invested for a quarter.

Use liquid funds as strategic reserves

Liquid mutual funds create a strategic cash reserve to fund expansion plans, new marketing campaigns, contingencies, or other needs arising during business growth. They allow easy access to cash reserves compared to fixed deposits. The liquidity, low volatility and stable returns make them ideal reserves. Payroll requirements, equipment purchases, promotional activities, etc. can be funded from liquid reserves as the business scales up.

Automate lumpsum and SIP investments

Systematic investment plans allow automatically investing surplus cash in liquid funds at specified intervals. Lumpsum investments can also be made whenever excess cash accumulates. This disciplined approach takes full advantage of the accrued returns. Automating investments ensures the surplus cash is optimally utilised.

Redeem strategically aligning with cashflow needs

Planned redemptions to align with business needs ensure optimal utility of the accrued corpus and returns. Redeem partially if the requirement is less than the corpus. Redeem strategically in phases to fund month-on-month needs. Ensure some minimum reserves remain to keep earning returns. Staggered redemptions aligned to cashflow needs provide maximum benefit.

Utilise multiple liquid funds for diversification 

Allocating across multiple liquid funds from different fund houses mitigates risk through diversification. It also allows parking larger reserves to fully tap the category’s growth potential. Categorise funds as primary reserves, secondary reserves, etc. based on purpose. Work with advisors to create an optimal multi-fund portfolio with strategic allotment across plans.

Review and rebalance portfolio periodically

Review liquid fund investments periodically to ensure optimal alignment with business needs amidst growth. As scale increases, re-assess cashflow cycles, growth plans and contingency needs. Evaluate if the liquid fund’s portfolio requires rebalancing to meet changing needs. Factor in returns and taxation for strategic portfolio rebalancing. 

Conclusion

Liquid mutual funds offer an effective cash management tool for high-growth firms to park surplus cash for optimal returns while maintaining easy access to liquidity. Planned investments, strategic redemptions and periodic rebalancing of a multi-fund portfolio can allow businesses to scale up to Rs. 5 crores efficiently.