Corporate Treasury Management: Beyond FDs and Liquid Funds

Indian companies collectively hold a staggering amount in FDs and liquid funds — conservative estimates suggest upward of ₹10 lakh crore in corporate treasuries sits in instruments yielding 6–7.5% pre-tax. For most CFOs, this is the path of least resistance: FDs are familiar, liquid, and carry no headline risk if something goes wrong. The opportunity cost, however, is enormous.

Post the April 2023 debt fund taxation change, the 'indexation benefit' advantage of debt mutual funds largely disappeared — gains are now taxed at slab rates regardless of holding period. This removed a significant incentive for corporates to move from FDs. But it didn't remove the return differential.

The alternatives worth considering for corporate treasuries: **Short-duration bond funds** from top-rated AMCs with predominantly AA+ and AAA-rated paper can generate 7.5–8.5% pre-tax with better liquidity than FDs. The credit risk is comparable to a well-structured FD portfolio if the fund selection is rigorous. **Arbitrage funds** offer equity mutual fund taxation (12.5% LTCG after 12 months, 20% STCG before) on returns that are essentially debt-like (6.5–7.5%). For companies in the 30%+ tax bracket, this is materially better post-tax than FDs even at lower pre-tax yields. **Structured debt instruments** — like the IIFL Corporate Fund — target 9–11% with defined maturity windows and investment-grade paper. The credit analysis required is more intensive, but the return uplift is significant.

The framework for a CFO evaluating treasury alternatives: (1) What is the minimum liquidity requirement? Anything needed within 90 days should stay in liquid funds or savings accounts. (2) For the 90-day to 12-month window: short-duration bond funds or arbitrage funds based on tax situation. (3) For capital held for 12–36 months with defined future requirements: structured debt instruments with matching tenure.

The conversation around corporate treasury management is often treated as purely a risk management function. The better framing is: treasury capital that isn't earning its maximum risk-adjusted return is capital with a silent opportunity cost. For a company holding ₹50 Cr in FDs at 7% versus a well-managed alternative earning 9.5%, the annual cost of inaction is ₹1.25 Crore — every year.

Before making any treasury investment, verify the product's credit ratings, consult your company's investment policy statement, and ensure the decision is appropriately documented and approved. All investments carry risk — there is no risk-free path to higher returns.