Investing for the future: A guide for businesses

I have an investment advisory firm for the past two decades and I had the opportunity to meet many businesspeople in this regard. When asked to invest a part of their profits or savings in sound investment schemes like mutual funds, the consistent answer is: “If I plough back these savings into my own business, I can generate better growth than anything else. So, I don't invest in other assets.” Let's check if this is true.

A story of survival

A company that was extraordinarily successful in the field of printing took our advice to make investments. They had to raise a large amount of money to replace an extremely expensive piece of machinery. For this, as per our advice, a fixed amount is invested every month in various mutual fund schemes. They suffered a lot of damage in the 2018 flood and then gradually became profitable. During this period, their monthly investments were often stalled.

Then the digital revolution and the pandemic affected the printing industry very badly. Then he required huge funds to innovate and make a fresh start. His investments in the mutual funds had given him good returns and so he was able to withdraw a part of it and move forward successfully.

The experience described above is true to the saying that if you plant seeds in times of prosperity, you can enjoy its fruits in times of distress.

Some of the following reasons justify setting aside a stipulated amount from the profits or savings from the business to make investments over a period:

• Unexpected setbacks or global recessions can lead to extended periods of loss. Investments like the one mentioned above can be immensely helpful to overcome such situations.
• Capital is often needed to keep a business competitive and to keep abreast of changes.
• Depreciation on assets is reflected in the annual accounts and deducted from the profit. But if this amount is not set aside and invested, funds are invariably found to be insufficient when the time comes to invest on the same asset. It is advisable to invest the amount set aside for depreciation in sound investment schemes.
• Big firms like Reliance, Wipro, TCS, and their promoters invest part of their savings in stocks and bonds of other companies. This is to diversify the risk and profit from the growth of other firms.
• Large sums of money are suddenly needed for many long-term needs of the employees. Examples are retirement gratuity and other benefits. If a certain amount is set aside for this monthly, the organisation can easily manage this demand.

Key points for making investment

When looking for an answer to the question of how to invest, keep in mind the following:  

• How long can you invest?
• What risk are you willing to take?
• Matters relating to taxation.
• Liquidity of investment. Can it be withdrawn if necessary?
• Expected return

Where to invest?

● A certain percentage of deposits can be placed in banks as fixed deposits. FDs are attractive because they can be withdrawn anytime, and overdraft loans can be taken on them. But the reality is that the element of taxation reduces its returns considerably.
● Investments in mutual funds are often best suited for companies. As many people think, market-linked investments are not the only thing that you can do with mutual funds. Debt funds, gold funds, and low-risk arbitrage funds are all available in mutual funds. Many of the schemes in mutual funds are helpful for companies in terms of taxation compared to conventional investments. There is no doubt that market-linked mutual funds are effective in capturing a share of the growth achieved at the national level.
● Most people have been using the route of investment in real estate. A slowdown in the real estate sector, adverse effects of taxation, and lack of liquidity are keeping people away from this avenue of investment. Often, long-term leasing of institutional assets is more economical and wiser than owning them.

Seek professional help

Making correct decisions about where, how, and when to invest and withdraw is not something that can be done without professional help. Often even those who are knowledgeable in the field of finance do not seem to have a comprehensive understanding of such matters. It will be a good decision if you seek the help of a financial planner who has experience in investment planning for companies.

(The author is the Director of Hanhold Consulting Pvt. Ltd. E-mail: reachus@hanhold.com Web: www.hanhold.com Tel: 62386 01079)

*This article was originally published in Dhanam Business Magazine.