Thanks to their ability to grow profits and offer diversification, mutual funds have slowly evolved as a popular investment option among corporates. However, a common question that baffles most business owners is how much they should invest in this asset class. This blog can be your guiding light if you also have this question.
No Definite Answer
There’s no definite answer to the quantum of business money investment in mutual funds. This is because revenues, corporate goals, investment horizon, and risk tolerance varies across business owners and organisations. Having said that, certain parameters can help you zero in on an amount to invest in mutual funds. What are these? Let’s find out.
Essential Parameters
- Amount of Idle Cash
The amount of idle cash is a crucial factor that business owners must consider when deciding how much to invest in mutual funds. Idle cash refers to the cash reserves a business holds in its accounts, which are not being used for any purpose. If a business has a substantial amount of idle cash, investing some of it in mutual funds is wise, as this can provide higher returns than leaving the money sitting idle.
Most businesses have around 15 to 20 days when they don’t have any significant expenses. If the money lying in the current account (which fetches no returns) is invested in mutual funds, you can potentially make profits worth a few lakhs. According to estimates, if you invest ₹ 50 lakhs on weekends and holidays, you can potentially make profits worth ₹2 lakhs.
- Corporate Goals
This is another essential factor to consider while computing the amount of money to invest in mutual funds. What is the purpose of the investment? Are you looking for short-term gains or long-term growth? Do you need to generate income, or are you willing to take on more risk for the potential of higher returns? If your goal is to generate income, consider investing a specific amount in debt mutual funds, which invest in bonds and other debt securities that pay regular interest.
Debt funds generally offer lower returns than equity mutual funds but are less volatile and can provide a steady income stream. This makes them more suitable if you have a sizeable investible surplus as chances of suffering losses and erosion of gains subsequently are less.
On the other hand, if you are looking for long-term growth, consider investing in equity mutual funds, which invest in stocks and offer the potential for higher returns over time. However, equity funds can also be more volatile and may not be suitable if you have a low-risk tolerance.
- Amount Needed to Reach Goal
When you invest business money in mutual funds, you want to achieve a certain amount to fulfill your corporate goal. Considering that amount, the fund’s potential returns, and your investment horizon, you can calculate the amount you wish to invest. Many online calculators are available which can help you in this exercise.
All you need to do is input your targeted amount, number of years to achieve your goal, the expected rate of return, and the calculator will do the job for you. For example, if your target amount is ₹10 lakhs in 2 years in a fund offering 7% annualised rate of return, you would approximately need to invest ₹8.73 lakhs (see image).
Summing Up
As evident, there is no one-size-fits-all approach to deciding the amount to invest in mutual funds. While considering mutual fund investment options, you must adopt a holistic approach and have a 360-degree view of your finances before committing.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
