Options for investing surplus funds

Companies often have surplus funds for a short period of time before they are required for capital expenditures, loan repayment, for some other purpose. These funds may be deployed in a variety of ways. At one end of the spectrum is the term deposit (to be made for a minimum period of 46 days) in a bank, virtually a risk free investment, that offers are relatively modest rate of interest; at the other end of the spectrum is the investment in equity shares which can produce highly volatile returns. In between life several other venues like units public sector bonds treasury bills in corporate deposits and bill discounting. This section looks at the options available for deploying surplus funds.

Units of the unit 1964 scheme 

The most important mutual fund scheme in India, the unit scheme 1964 of the Unit Trust of India, has the following features:

a)  it is an open ended scheme as it accepts funds from investors and also permits them to withdraw their investment on a continuing basis.

b) the units have a face value of rupees 10. The sale and purchase price of units are not squarely based on the net asset value per unit, as should be the case for a truly open ended scheme. Instead they are determined administratively in such a manner that they rise gradually over time.

The units of the unit 1964 scheme offer a convenient and attractive Avenue for investing short term funds for the following reasons: 

a) There is a very active secondary market for units. For example, if the sale and repurchase prices fixed by the unit Trust of India are, say, ₹ 16.00 and ₹15.00, respectively, the units are traded activity in the secondary market around ₹15.60 with a spread of few paise between the buying and selling rates.

b) unit appreciate overtime in a fairly predictable manner as a Unit Trust of India makes a gradual upward revision in its selling and purchase price from July to June.