Can a charitable trust invest in mutual funds?
A charitable or educational trust may hold units of SEBI-registered mutual funds under the Income Tax Act, if its trust deed allows it. [PENDING: confirm current section numbers under the Income Tax Act 2025] This makes it possible for an institute to put its spare fee collections to work between the dates it receives income and the dates it pays expenses.
This is worth knowing because schools and colleges often have a distinct mismatch between when they receive money and when they spend it. Fees usually arrive in large amounts at the beginning of a term, while salaries, rent, and bills are paid every month. Understanding how this money can be managed helps an institute keep its cash working while it is not yet needed for operations.
Why does fee money sit idle in a school's current account?
An educational institute often faces a specific cash flow pattern that leaves large sums of money unused for months. Whether it is a school, a college, or a coaching centre, the income usually arrives in significant chunks. A large sum might be collected in June at the start of the academic year, and another in January when the second term begins.
The expenses, however, follow a monthly rhythm. Salaries for teachers and staff, electricity bills, maintenance costs, and taxes like GST and TDS must be paid every month. This means that a large portion of the fees collected in June is not actually needed until August, September, or October. It stays in the bank account, waiting for the payroll or vendor bills of the coming months.
In India, a current account pays no interest. While the money sits in the account waiting for the September payroll or the December maintenance bill, it earns nothing for the institute. For a school with large collections, this idle cash represents a missed opportunity for the funds to earn while they wait. For the accountant running the bank account, tracking these idle balances and deciding what to do with them can become a significant manual task.
Consider an illustrative example of a coaching institute that collects ₹1 Crore in fees at the start of a course. If its monthly expenses for staff and premises are ₹10 Lakh, it will take ten months to use that entire collection. For much of the year, a significant portion of that ₹1 Crore is sitting unused and earning nothing in a current account.
Why don't fixed deposits fit monthly salary cycles?
The traditional way to handle spare cash is to move it into a fixed deposit. An FD is a bank deposit with an interest rate that is fixed on the day it is opened. This provides certainty and safety, which are real strengths for many institutions that prefer to know exactly what they will earn.
However, an FD asks the school to decide, months ahead, the exact day it will need the money back. Because an institute has expenses every single month, a single maturity date rarely lines up with its needs. If a school puts its fees into an FD and then a vendor bill or an advance tax payment falls due before that FD matures, it may have to break the deposit early.
Breaking an FD early usually costs a penalty. To avoid this, an institute might try to open several smaller FDs with different maturity dates to match each month of the academic year. This creates a high administrative burden for the office staff. If the dates or the amounts are not calculated perfectly, the school still faces penalties or finds itself short of cash in the current account.
There is also a tax point to consider. FD interest is taxed every year as it builds up, even before the FD matures and the cash is received. This means the institute may have to pay tax on income it has not yet physically realized in its bank account.
How can liquid funds help manage a school's cash flow?
Spare cash can move from the current account into liquid mutual funds instead. There, it can earn while it waits for a payment to fall due. When the school needs to pay salaries or vendors, the money comes back to the bank account. This fluid movement allows the institute to keep its money working without the rigid structure of a fixed deposit.
This fits the needs of an educational institute for three main reasons:
- You take out what you need. A school can take out part of the money for monthly salaries and leave the rest of the funds to continue earning. There is no requirement to pick a maturity date in advance for the entire sum.
- Speed of access. The money comes back within three business days, usually sooner. This allows the institute to keep its cash working until just before the payment date arrives.
- Custody and control. The units stay in the name of the institute or trust. The approvers named by the board or the trustees sign off every movement of the money, ensuring the process remains under the institution's control.
It is important to understand the differences between a liquid fund and an FD before moving any money. A liquid fund is not bank-guaranteed, and its value can move. Taking money out within the first few days after moving it in can carry a small charge.
The tax treatment also differs. For a company or a trust, gains are taxed at the normal rate when the units are sold. This aligns the tax payment with the moment the institute actually has the gains in its bank account. Whether liquid funds are the right choice for an institute's spare cash is a decision for its own leadership to make.
How Idlewise helps
Idlewise helps companies earn on every idle rupee. Your money stays in your own account, and it is back in the bank before every payment. It is ready for your auditors.
Idlewise is offered by Sigfyn Financial Services Private Limited, an AMFI-registered mutual fund distributor (ARN-254976).
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Idlewise is offered by Sigfyn Financial Services Private Limited, an AMFI-registered mutual fund distributor (ARN-254976). Sigfyn distributes mutual funds; it does not provide investment advice. Mutual fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not indicative of future returns.