Corporate Treasury management : Liquid Funds (also known as Money Market Mutual Funds) for parking short term funds at interest rate higher than bank deposits

Liquid Funds (also known as Money Market Mutual Funds) have portfolios having average maturities of less than or equal to 1 year. Thus such schemes normally do not carry any interest rate risk. Liquid Funds do not carry Exit Loads. Other recurring expenses associated with Liquid Schemes are also kept to a bare minimum.

Money Market refers to that part of the debt market where papers with maturities less than 1 year is traded. Commercial Papers, Certificate of Deposits, Treasury Bills, Collateralised Borrowing & Lending Obligations (CBLOs), Interest Rate Swaps (IRS), etc. are the instruments which comprise this market

Out of the various debit instruments, money market instruments stand out in terms of the term to maturity. Debt papers have wide range of term to maturity - as high as 20 years and more or as low as 90 days and less. The market for short term paper; i.e. paper with less than 1 year maturity attracts huge interest, volumes and money. This is because the demand for short term money by corporates, financial institutions and Government is huge. At the same time, there is a class of investors with which there is an availability of short term funds.

Due to this constant demand and ready investors, the volumes in trades of this short-term paper have increased so much that this segment is classified as a separate segment in the debt markets and is known as Money Markets.

By far the biggest contributor to the MF industry, Liquid Funds attract a lot of institutional and High Networth Individuals (HNI) money. It accounts for approximately 40% of industry AUM. Less risky and better returns than a bank current account, are the two plus points of Liquid Funds.

Corporate Treasury Management: Business transactional account Vs short term investment account 

Corporate Funds that are in a business transactional account( called current account in some countries) are  non interest bearing account .These funds can be invested into an short term investment account that earns interest .
The bank has informed that the existing business cheque account cannot be converted into an investment account and therefore we need to open a new investment account where the funds are kept separately from the cheque account.

Out of the available options for investment account, bank has suggested to opt for 7 day notice deposit account that earns a higher rate of interest than other short term investment options.
The features of  7 day notice deposit offered by First National Bank South Africa (of First Rand group) as are follows  :

·         Minimum opening balance  R50 000.00
·         The access to funds can be done with a letter instructing the bank to place 7 day notice  when funds are required.
·         Only the authorised signatories are allowed to place a notice for the withdrawal of the funds.
·         Funds can be added to the 7 day notice at any time, electronically (internet banking) or via an written instruction to the bank with authorisation from the signatories only.
·          The Interest rate increases twice - once after 32 days and another after 64 days   on the same 7 day notice account.
·         Interest earned on this account can be capitalized on the same account or it can be paid out to the business cheque account.
·         There is no monthly or transaction fees on the 7 day account.
·         There is no cash or cheque deposit allowed on this account.