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SMEs must invest cash lying idle in short-term plans
Published On , 19 Jul 2017 By Times Of India
In India, there are about three crore small and medium enterprises (SMEs), contributing about 45% of the country’s industrial output and 40% of exports,which translates to around 17% of India’s GDP. Given the various incentives by the government, these figures are expected to rise as we move forward. However,most SMEs lack in one particular aspect, that of efficiently managing whatever small amount of cash they have at their disposal.
Officials at large companies, which have grown from their humble days, say that with their cash every SME should keep three things in mind: liquidity, safety and return. However, in most cases it is found that unaware of the options available for generating higher returns on their cash, SMEs keep most of it in current accounts and bank FDs. These avenues give them enough safety, some amount of liquidity but sub optimum returns on post-tax basis. There are better investment options in the market which can help them optimize their returns.
Among such investments are liquid and liquid plus plans which offer high liquidity and higher post tax returns, but come at a slightly higher risk. Back of the envelope calculations show that post-tax returns from these funds are usually 8-12% higher than what bank FDs can generate.
Here, the point to remember is that like FDs, returns on Liquid Funds too are linked to the prevailing market rate. As an SME money manager, one has to keep this in mind.
Another investment option is the fixed maturity plans (FMPs). These schemes give nearly a guaranteed return with a high degree of safety. However, investing in FMPs means sacrificing liquidity since investments in these schemes are locked in for the duration of the scheme. Although these schemes are listed, there is hardly any trading in these papers.
Some taxation issues also kick in. If an SME has some loan on their books, these companies should consider the growth option over dividend option in liquid and liquid plus funds. This is because tax officials often invoke section 14A of the Income Tax Act to deny the benefits of lower tax outgo from dividend income if the company also has loans on its books.Subsequently,such treatment can lead to litigations. However, an SME with no loans on its books does not need to bother about Section 14A. In such a situation, the SME can invest in the dividend option.
Another investment option for SMEs is the non-convertible debentures (NCDs) of companies. SME money managers investing in these instruments and also in FMPs also need to keep in mind credit quality. Often FMPs indicate higher returns but to do that they compromise on the credit quality of the papers they put their money in. Credit quality does not matter much if the investments are for up to 2-3 weeks.However, for anything more than that, one should be careful about the ratings of the papers which are in the portfolio of the fund.
SME money managers should also look for opportunities to invest in schemes which would pay dividend over the next few days. An SME can invest in such schemes, pocket the dividend and then sell at the post dividend NAV to take advantage of the capital gains rules.
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