Knowledge Base

What are the best short term investments?

Short-term investments are ideal for anybody looking to grow their money in a short span of time. Some of the best short term investment options are liquid funds, savings accounts, short term funds, treasury bills, invoice discounting etc.

Anybody who is looking to increase their money in a short time should go for short term investment. Some of the best short term investment options are

Liquid funds: Liquid funds are low-risk investments that always manage to maintain their Net Asset Value (NAV) making them a safe alternative.

Savings account: Banks offer different interest rates for the amount you have deposited which varies from 4 to 7 per cent.

Short term funds: Short term funds have a focus on investment protection with a really flexible tenure rate.

Treasury bills: RBI (Reserve Bank of India) institutes auctions for the purpose of selling treasury bills to the general public on a monthly basis. These are very low-risk investments as the bills themselves are supplied by the Central Government.

Invoice discounting: Invoice Discounting is a spectacular investment opportunity that can lead to tangible gains for a prospecting investor. This is because the invoices which are raised against prominent blue-chip companies offer a very safe avenue for capital accumulation with minimal risks. Read more

What is an example of a short term investment?

An example of a short term investment is investing in invoice discounting as they offer a very safe avenue for capital accumulation with minimal risk.

Invoice discounting is an excellent example of short term investment as they provide a very safe avenue for capital accumulation with minimal risk. Invoice Discounting is a spectacular investment opportunity that can lead to tangible gains for a prospecting investor. It enables high returns with minimal risk in a short time. KredX allows investors to invest their money with the help of invoice discounting. There are various benefits of considering invoice discounting at KredX as an investment like short term investment, safe investment, high returns, technologically enhanced, diverse investment portfolio among others. Read more

Where can I invest my short term money?

Short term investment enables a person to grow their money in a short time. Some of the places where you can invest your short term money are saving accounts, invoice discounting, liquid funds, treasury bills and short term funds.

Short term investment allows a person to increase their money in a short time. Some places where you can invest your money for a short period are

Saving accounts: Saving accounts make it possible to have access to liquid cash at all times. Interest rates varying from 4 to 7 percent are offered by banks. Some banks even offer free accident cover to new customers.

Invoice discounting: Invoice discounting helps with the financial needs of organisations which are going through cash flow issues. It is also a spectacular investment opportunity that can lead to tangible gains for a prospecting investor as it comes with minimal risks.

Liquid Funds: As liquid fund always manage to maintain their Net Asset Value (NAV) and they come with low risk, they make an excellent investment option.

Treasury bills: These bills are auctioned on a monthly basis by the RBI for the general public. As these bills are supplied by the government, they come at a low risk.

Short-term funds: Short-term funds come with flexible tenure rates along with investment protection. Since, the short term funds have a small tenure they put your investment under a very modest tax bracket. Read more

 

What is considered a short term investment?

For an investment to be considered short-term, the investment should be for lesser than 5 years and the returns should easily convert to cash when the time is right.

An investment is considered a short-term investment when the time period is lesser than 5 years and the returns are easily converted to cash at the right time. Some examples of short term investments are

Short term investment enables a person to grow their money in a short time. Some of the places where you can invest your short term money are

Saving accounts: Saving accounts make it possible to have access to liquid cash at all times. Interest rates varying from 4 to 7 percent are offered by banks. Some banks even offer free accident cover to new customers.

Invoice discounting: Invoice discounting helps with the financial needs of organisations which are going through cash flow issues. It is also a spectacular investment opportunity that can lead to tangible gains for a prospecting investor as it comes with minimal risks. Read more

 

How do I invest in ultra short term funds?

Ultra short term funds which have an average maturity that range from 6 months to 1 year in most cases. There are various ways to invest in Ultra short term funds like investing in ultra short term mutual funds, invoice discounting, deposits, treasury bills, commercial papers etc.

Funds which usually have a maturity time that ranges from 6 months to 1 year are called ultra short term funds. The ways to invest in ultra short terms funds are investing in mutual funds, invoice discounting, treasury bills, commercial papers and corporate bonds.

Mutual Funds: As per the rules set by the Securities and Exchange Board of India (SEBI) for liquid funds, it has been concluded that such funds can only invest in securities which mature up to 91 days. These rules are not valid for ultra short term bond funds. Hence, these bonds can be invested in securities that mature both before or after the 91-day period. Usually, the investment horizon for these ultra short-term funds varies from a week to about 18 months.

Invoice discounting:  Invoice discounting aids with the financial needs of organisations by solving their cash flow issues. Apart from that, it also a great investment opportunity which can lead to substantial gains in a short period of time with minimal risks.

Treasury bills: Treasury bills or T-bills are issued by the Indian Treasury and are short-term debt instruments. These bills are issues for a period of one year or less and are considered the world’s safest debt as they are backed by the full faith and credit of the government.

Commercial papers: These are unsecured, short-term debt instruments dispensed by a corporation, mainly for the financing of accounts payable and inventories, and meeting short-term liabilities. The maturity period for commercial paper is rarely longer than 270 days.

 

How diversified should a portfolio be?

A diversified portfolio should have capital spread across different asset classes. Doing so reduces the overall investment risk. There should be a mix of growth and defensive asset.

The modern portfolio theory states that 15-20 stocks from different sectors are sufficient to make a well-diversified portfolio. A mix of growth and defensive assets should be there. Defensive assets are investments which giver lower return over a long period of time like cash or fixed interest. Growth investment includes investments such as property and shares. They have higher returns, high risk and provide more capital.

Here are 5 tips to diversify your portfolio

  1. Consider bond or index funds: Apart from all the funds out there in the market, it is advisable to add index funds or fixed income funds to the existing funds.
  2. Keep building your portfolio: Make sure regular additions are made to your investments.
  3. Keep a watchful eye on commissions:  If you don’t understand trading very well,  make sure you at least understand what you are receiving for the fees you are paying.
  4. Spread the wealth: t is important to not put all your money in one stock or one sector, no matter how appealing equities may seem. It is better to create your own virtual mutual fund by investing in a handful of companies you know and trust.  
  5. Know when to get out: Just because you are good at buying, holding and dollar-cost averaging and have your investment on autopilot, it does not mean you should not recognize the signs of pulling the plug.

 

Is Accounts Receivable a short term investment?

No, accounts receivable is not a short term investment. Account receivable falls under assets when making an entry in the balance sheet.

A customer becomes an account receivable for the seller one he/she purchases goods or services with the promise of paying later for the goods or services. Due to this, the seller and the buyer share a creditor-debtor relationship until the time the payment is made by the buyer. As long as the debt is there, it remains under an asset account in the seller’s accounting system, “Account Receivable”. 

 

What are the benefits of diversification?

The benefits of diversification include minimising the risk of loss, preserving capital and generating returns.

There are multiple benefits of diversification like

  1. Minimising risk of loss: One of the major benefits of diversification is that over a certain period if one investment is performing poorly then there will be other investments which will be performing better in most of the cases. This reduces the possible losses to your investment portfolio from storing all your capital under one type of investment.
  2. Preserving capital: There might be some investors who don’t want to accumulate but would rather wan preserve their capital because of reasons like retirement. Portfolio diversification in such cases can help in protecting savings.
  3. Generating returns: There are many instances when your investment might now perform the way you expected. Portfolio diversification reduced your dependencies from one source of income.

 

 

Why invest in Blue-chip companies?

One should invest in a blue chip stock because they are known for their stability in rough market conditions. Usually, blue-chip companies are also the leaders in their sectors/industries.

The term “blue chip” comes from the game of poker, where a blue chip is of the highest value. Similarly, blue chips stocks hold high value and are excellent long term investment vehicles. From a very long time, they have shown growth in long-term portfolios. As such, Blue-chip stocks are stocks of well-known and well-established companies. There are various benefits of blue-chip stocks in the long run.

  • On-time payment of dividends: This factor decides the company’s blue-chip status. If the payments of dividends are consistent, then there is an additional income above the initial investment.
  • Consistent returns: The stable earning of blue-chip stocks are good for an investor’s portfolio as it also provides suitable returns making the investment worthwhile.
  • Goodwill and brand value: With the use of easy franchise availability, distribution advantage, and cost efficiency, they establish themselves as market leaders.
  • Financially Sound: Blue Chip companies enjoy a healthy and well-known financial base.

Risk Diversification: For investors who aren’t risk-averse, it is best for them to have some of the blue-chip companies in their portfolio as these companies are known for their stability.

 

 

What’s a blue-chip stock?

Stocks of large, well-established and financially able companies are called blue-chip stocks. The market capitalisation of blue-chip stocks are in billions and are usually the market leader or among the top ranks in their sector. These companies are among people. Some of the common blue-chip companies in India are Tata Consultancy Service, Reliance Digital, ITC Limited, HDFC Bank, Coal India etc.

 

What is Alternative Investment Fund?

An alternative investment is an asset which isn’t a prevalent investment option like bonds, stocks and cash. Institutional investors hold most alternative investment assets or accredited, high-net-worth individuals due to the complicated natures and restricted guidance of the investments. Alternative investments include managed futures, real estate, private equity, hedge funds, commodities, derivatives contracts and invoice discounting.

 

How to calculate working capital needs?

The formula for calculating working capital need is:

Working capital = Current Assets – Current Liabilities

Working capital is the capital of a business which is used in its everyday trading operation. Working capital needs can be determined by using the formula Working capital = Current Assets – Current Liabilities

This formula informs us about the short-term, liquid assets which are left over after paying off the short-term liabilities. It is a measure of an organisation’s short-term liquidity and crucial for performing financial analysis, financial modelling, and managing cash flow.

Current Assets:

 

Current Assets Amount
Cash Rs 40000
Accounts Receivable Rs 20000
Inventories Rs 50000
Total Rs 110000

 

Current Liabilities Amount
Accounts Payable Rs 40000
Short-term borrowing Rs 10000
Accrued Liabilities Rs 10000
Total Rs 60000

 

Working Capital Current Assets-Current Liabilities
Working Capital Rs 110000 – Rs 60000= Rs 50000

 

What are working capital solutions?

Working capital solutions involve equity, trade creditors, line of credit, short term loan and invoice discounting.

The total amount by which current assets exceed current financial liabilities is called working capital. To identify the working capital needs, one must first analyse the operating cycle. The operating cycle checks the account receivables, accounts payable and fulfilment cycle in terms of days. This means:

  • The average number of days which are taken to collect payment from customers is used to analyse accounts receivable.
  • The average number of days which are taken to pay a supplier invoice is used to analyse accounts payable.
  • The average number of days involved in delivering products or services sold to a customer is used to analyse fulfilment

In case, a business is experiencing a shortage of working capital, the following solutions can be chosen

  • Equity: When startups in their initial year of operations fail to earn profits, then they might be able to rely on equity funds as a short-term working capital solution. These funds can be obtained from their personal resources like a family member, friend or a third-party.
  • Trade Creditors: Temporary working capital can be obtained if solid relationships are maintained with the trade creditors. To maintain good relations with trade creditors, it is important to have a consistent history of on-time payments.
  • Invoice Discounting: Invoice discounting is another suitable option for new and established businesses who are looking for working capital financing. In this, a company raises a request for capital against the unpaid invoices. the process is speedy and convenient. Since quick access to money is given, companies are in a better position to pay on a timely basis to other companies.
  • Line of Credit: A company qualifies for a line of credit loan if it has equity and good collateral as this allows the company to borrow funds for short-term needs when needed.  Line-of-credit loans normally offer the lowest interest rate a bank offers as they are seen as fairly low risk. They are taken for the purpose payment of operating costs for working capital, inventory purchases and business operation needs. However, new businesses don’t often get a line of credit loans.
  • Short term loan: If a new business is not eligible for a line of credit loan from a bank, they can go for a short-term loan. However, this type of loan can be very costly, which in turn will keep the business locked in a debt cycle for a very long time.
What is invoice discounting?

Invoice Discounting or bill discounting is an alternative financing solution for companies which provide working capital finance by using the value of their unpaid invoices.

The practice of using a company’s unpaid account receivables as collateral for a loan and issued by a  finance company is called invoice discounting. The period of the loan is very short since the company which has given the loan can change the amount of debt outstanding as soon as the number of accounts receivable collateral changes. The amount of money issued against the unpaid invoices is less than the actual amount of invoice  (typically 80% of all invoices less than 90 days old). Read more

How does invoice discounting work?

Small businesses either provide services or products to big corporates. These small businesses thus form an integral part of Supply Chain for big corporates. Once the goods or services are supplied, these small businesses raise invoices to receive payment for their services and goods. These invoices are then sent for approval to the big corporates. Once approved and verified, the small business receives payment. This entire process can take anywhere between 30-120 days which means that businesses are devoid of their money for a long time, affecting their financial health.

  1. Small Business raises Invoices against the Big Corporate (Enterprise/Blue-chip Company) for the services provided/goods supplied.
  2. To avoid the delay, they can bring their invoices to an Invoice Discounting companies such as KredX for confidential invoice discounting.
  3. In 1-2 days, these invoices are converted to cash and transferred to small businesses at a pre-set discounting rate and tenure (normally ranging from 30-120 days).
  4. Small Business completes multiple business cycles in this tenure and upon release of payment from corporate, repays the Invoice Discounting Service Provider.

Discounting invoices hence provides businesses funds upfront rather than waiting for 30-120 days. The completion of multiple business cycles further helps in improving cash flow and increasing revenue rather than limiting operations due to lack of funds. read more

Which are the popular invoice discounting platforms in India?

A few e-discounting platforms in India that you can choose to liquidate your invoice are RXIL, Invoice Mart, M1 TreDs, KredX, Flexiloans and Priority Vendor.

Some of the popular invoice discounting platforms in India are:

1. RXIL: Receivables Exchange of India Ltd (RXIL) is a joint venture between National Stock Exchange (NSE) and Small Industries Development Bank of India (SIDBI). It went live in January 2017.  As per RXIL’s website, their primary objective is to act as a catalyst to achieve the entrepreneurial growth, economic success and financial stability of SMEs.

2. Invoice Mart: It is a joint venture between Mi Junction and Axis Bank and the platform is marketed by ATReDS. This platform connects the corporates, the SMEs (sellers) and financiers who usually bank on an e-platform. Based on the factoring option of discounting, Invoicemart platforms integrate seamlessly with their buyers’   existing ERP systems, enabling them to streamline their payments to their vendors. Launched in July, the platform has already seen invoice exchange worth INR 100 crore.

3. M1 TreDs: Mynd Solution which is a business process and technology management company is managing the TreDs Platform. They provide services in accounting, finance, information technology, consulting domain and human resource outsourcing.

Unlike the TreDs platform, M1 is also into reverse factoring apart from receivables factoring leading to higher transaction volumes flowing into the system and promoting better pricing.

The three companies who have received permission from the Reserve Bank of India to run the TreDs platform are IDBI, AXIS Bank, and Mynd Solutions.

4. KredX: KredX is an online invoice discounting platform where business owners get an opportunity to raise funds for their working capital needs at attractive terms by selling their unpaid invoices raised on blue-chip companies. KredX aims to remove operational inefficiencies around the invoice discounting space by extensively using technology and its data analytics and credit underwriting capabilities.

5. Flexiloans: FlexiLoans is a lender where the platform discounts bill through their lending product called Flexi Vendor Financing. The company has a set of mentioned guidelines to lessen its risk like the company needs to be around a year old and should have a turnover of INR 20 lakh.

6. Priority Vendor: The platform is cloud-based and uses Artificial Intelligence to discount the bill. This platform is accessible only ‘by invitation’. Priority Vendors have tied up with companies like Whirlpool, Dabur, TVS,  Godrej Consumer Goods, among others.

 

What is invoice discounting definition?

“Invoice discounting is the practice of using a company’s unpaid accounts receivable as collateral for a loan, which is issued by a finance company. This is an extremely short-term form of borrowing since the finance company can alter the amount of debt outstanding as soon as the amount of accounts receivable collateral changes. The amount of debt issued by the finance company is less than the total amount of outstanding receivables (typically 80% of all invoices less than 90 days old). The finance company is generally not more selective than simply allowing a percentage of all invoices outstanding, thereby relying on a spread of receivables among many customers to keep from losing collateral.”

Invoice discounting is the practice of using a company’s unpaid invoices to raise working capital & fulfil its financial needs. Traditionally, financial institutions including banks and NBFCs have been discounting invoices for MSMEs. Invoice discounting involves the transfer of rights on an asset (invoice) from the seller (i.e. business) to the financier (i.e. investor) at an agreed value. Read more

What factors determine the working capital needs of a firm?

The need for working capital for a small to medium scale enterprise depends on factors like lengths of operation cycles, sales, nature of the business, terms of credits, turnover of inventories, nature of productional technologies, seasonal variations, and contingencies.

The total amount by which current assets exceed current financial liabilities is called working capital. The formula to calculate working capital is Working capital = Current Assets – Current Liabilities. The need for working capital in a small or medium enterprise can be identified by the following factors.

1.) Sales: Size of sales is one of the most important factors as compared to others for determining the amount of working capital that is required. The enterprise needs to maintain the current assets of the company to increase the volume of sales in the company.

2.)  Length of the operating cycle:  ‘Length of operating cycle’ is the conversion of cash through various stages like raw material, semi-processed goods, the final product, sales, debtors and bills receivables into cash over a period of time.

3.) Nature of business: The need for working capital also varies from company to company depending upon the nature of the business. For example, manufacturing companies require less working capital than trading companies. The reason for this is that a trading company requires huge massive quantities of goods to be held in stock along with carrying large amounts of working capital than concerns about manufacturing.

4.) Terms of credit: The term of credit allowed to the customer is another significant factor in determining working capital.  For example, a company may provide only 15 days credit whereas another company may allow a credit of 90 days to its customers. There can be cases where an organisation provides credit only to reliable and selected customers or there can be an organisation which extends credit facility to all its customers.

5.) Seasonal variations:  For those enterprises whose business depends on the season may need more working capital to meet their increased operations in a particular season. One such example would be sugar factories whose business are very seasonal.

6.) Turnover of Inventories: When the turnover for large inventories is slow, a company needs more working capital. On the other hand, if inventories are small but still have a quick turnover, the amount of working capital needed by the company will be small in size.

7.) Nature of Production Technology: If technology is labour intensive then the entire unit will need more working capital as the company will have to pay the wages to everyone. If a production company has a technology which uses more bots, the expenses of wages are cut down resulting in a lesser amount of working capital.

8.) Contingencies: If there is a fluctuation in the demand and price of a product of a small-scale enterprise, the contingency provisions will have to be made for meeting the fluctuations. This will result in an increase in the requirement of working capital.

Keeping a close eye on the above factors can also help you reduce working capital needs.

What is the difference between invoice discounting and factoring?

Factoring and Invoice Discounting, both are financial services which can clear the funds bound in your unpaid invoices, including a provider who accepts to furnish money towards outstanding debtor balances. With factoring, the role of managing the sales ledger, credit control and tracking customers for settlement of their invoices is done by the provider. Whereas with invoice discounting, a business maintains control of its own sales ledger and pursues payment in the usual way.

Invoice discounting and factoring are financial assistance which helps in getting those funds which are bound in an unpaid invoice, including a provider who accepts to provide money towards outstanding debtor balances. Following are the differences between invoice discounting and factoring:

  • With invoice discounting, a business maintains control of its own sales ledger and pursues payment in the usual way whereas, with factoring, the provider takes up the role of managing credit controls, tracking customers for settlement of their invoices and managing the sales ledger.
  • Customers are more aware of the factoring arrangements as factoring enables the customers to settle their bills directly with the factoring company. With invoice discounting, clients pay directly without the need for them to know about a third party involvement.
How does invoice discounting work?

A person sends out invoices daily as and when their work is completed. Once the lender has received the copy of the invoice, a pre-agreed proportion of each invoice is deposited to the bank account. This money can then be used for various things like paying bills, repaying debt, or as part of a long-term plan for growth.

For a successful invoice discounting, it is vital to send out the invoices immediately after the work has been completed as it enables a continuous influx of cash throughout the month. On getting paid the agreed percentage of each invoice which is usually around 80% to 90% of the total, one can collect the payment from their client as usual.

Charges and regular fees are deducted from the outstanding balance and are claimed by the lender. The fee and the charges should be transparent, and the structure should be made clear by the financier along with all other invoice discounting terms.

What is confidential invoice discounting?

A confidential Invoice Discounting Facility is a kind of invoice finance that can increase a company’s cash flow by releasing funds from outstanding bills for immediate use. This facility is confidential which means that the debtors aren’t informed about such an agreement. This is a swift solution for those businesses which invoice other businesses in arrears.

What does invoice finance mean?

Invoice financing is a method for businesses to borrow money against the amounts due from the clients. It helps businesses to increase their cash flow, pay employees and suppliers and reinvest in operations and growth before they could if they had to wait until their clients paid their balances entirely. Businesses pay a certain percentage of the bill amount to the lender as a fee for borrowing the money. Invoice financing can resolve difficulties connected with customers taking a long time to pay problems obtaining other types of business credit.

What is debt factoring?

Debt factoring is a financial arrangement where a factoring organisation takes charge of collecting money relating to a company’s invoice and quickly pays that business part of the total amount owed on the bills.

How do you discount a bill of exchange?

In case the drawer of the bill does not want to abide until the scheduled date of the bill and requires money, the bill can be sold to the bank by the drawer at a discounted rate. The bill will be endorsed by the drawer which will contain a date and sign to pay the bank. The bank will pay cash to the drawer corresponding to the face value minus the interest or discount at an agreed rate for the number of days it has to run after receiving the bill. This is known as discounting of a bill of exchange.