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Market Update
Cash Flow Management

Over the last three to four years, since the Indian economy started slowing down from a double-digit rate of growth to less than half of that, small and medium enterprises (SMEs) have been at the receiving end.

On the one hand, demand in the economy in general has been low, with their bigger peers and consumers cutting margins and delaying payment. But, at the same time, banks have been stingy in advancing loans and are not any liberal with funds given to them.

In such a tough situation, it makes all the more sense for SMEs to look for ways to manage their money in a smarter way so that their hard-earned money works harder for them. One of the ways for this, according to mutual fund industry officials and financial advisers, is to use liquid funds for parking extra funds that they may not need for the short term. It could be from just a couple of days to a few weeks. Liquid funds are those mutual fund schemes which invest in fixed income securities with a residual maturity of 91 days or less. These funds invest their corpus in short-term debt instruments like money market instruments, short-term corporate deposits, treasury bills of the government, etc. A big advantage of investing in liquid funds is that they dont have any exit loads. So, investors in these schemes can invest in and invest out within a few days without any cost to them.

How to go about it?

Suppose an SME has Rs 1 crore in cash that it would not need for three days, after which it would need to make some payment which will exhaust a major part of this cash. So the SME can now invest that money in a liquid scheme of a good fund house and earn an income at the rate of about 8% per annum for those three days. In comparison, if that SME had kept the money in a current account, it would not earn any return for the company . The advantage of earning higher returns at a very low risk and the flexibility of parking extra funds should make liquid funds an attractive proposition for SMEs who are always looking for ways to make some extra money and make their financial situation slightly better.