Optimizing Corporate Fund Parking: Debt Options and Considerations

For corporate entities, the decision on how to park their funds efficiently is critical. Depending on the duration of liquidity required and the specific purpose of the funds, there are various options available. This article will explore the best practices and considerations for choosing the most appropriate debt options for parking corporate funds.

1. Temporary Liquidity Parking

If you are looking to park corporate funds with a temporary liquidity requirement of 1–3 months or less, there are specific strategies to consider. Auto Fixed Deposits (FD) Facility, available through banks, is an excellent option.

With an Auto FD facility, if the corporate account balance exceeds a certain limit, e.g., 1L, the bank automatically transfers these moneys to an FD. When funds are withdrawn, the FD is automatically redeemed, and the proceeds are credited back to the current account. However, it is essential to understand the following key points:

Minimum Days Requirement: Not all banks mandate a minimum number of days for generating interest. Some may require just a few days, while others might stipulate 7 or 10 days. Calculation of Interest: Depending on the tenure of the FD, the interest rate can vary. For short terms like 10 days or a month, the rate might be equivalent to the savings account rate or the most favorable rate for a month.

It's not advisable to consider liquid funds or overnight funds due to the associated stamp duty and exit loads, which can be up to 7 days, making the return less attractive.

2. Long-term Special Purpose Fund Parking

If you are planning to park funds for a specific long-term purpose, say 6–12 months or more, such as purchasing a factory or property, different debt options might be more suitable.

Debt Mutual Funds can be considered, as they offer a balance between liquidity and returns. Additionally, consulting with financial advisors can help tailor the investment to meet specific needs and timelines.

3. Long-term Employee Benefits and Investments

For funding employee benefits such as gratuity, retirement support, or other long-term purposes, companies can take on a slightly higher risk by investing in hybrid securities or even equity securities. However, it is crucial to have a well-defined Investment Policy Statement that guides the investment decisions.

This policy should outline where, when, how, and for what purpose to invest, as well as methods for monitoring, re-balancing, and reviewing the portfolio regularly.

4. Debt Options Overview

Long-term debt parking options include:

Overnight Funds: Ideal for very short periods, typically up to a fortnight, these funds have no exit load. Liquid Funds: Also suitable for short periods but come with a minor exit load for the first 6 days. Long-term Debt Funds: For longer-term parking, although these may carry higher risks or volatility.

It’s important to carefully consider the tenure and purpose of the funds to choose the most appropriate option.

Conclusion

The optimal parking of corporate funds involves a nuanced understanding of the specific requirements and the ability to choose the right debt options. A well-crafted Investment Policy Statement and regular reviews can help guide these decisions, ensuring the funds are parked efficiently and effectively.