Idle Funds

What is ‘Idle Funds’

Money that is not invested and, therefore, earning no interest or investment income. Idle funds are simply funds that are not deposited in an interest bearing or investment tracking vehicle, that is, not participating in the economic markets. These funds are often thought of as “wasted” funds, since they do not appreciate in any manner.

Explaining ‘Idle Funds’

In instances where there is a positive inflation rate in a domestic nation, idle funds will actually decrease in value from a purchasing power perspective, as the funds fail to keep up with the rate of inflation. One option individuals have to earn income on funds, while maintaining liquidity of those funds, is to invest in money market or short-term interest accounts that will provide the depositor with a short-term rate of interest.

Idle Funds FAQ

How do you use idle cash?

You can use idle cash by depositing it in a bank account, either a checking or a saving account. A checking account is the most liquid and allows the user to withdraw cash immediately, but has very low interest. However, earning something is always better than cash sitting idle and earning nothing.

How much cash reserve should I have?

Most financial experts suggest you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that’s usually how long it takes the average person to find a job.

Which account gives attractive returns on idle money?

Liquid funds provide better returns than a savings bank account and is easily liquidated as well, making them attractive. Liquid funds attract taxes on both long term capital gains (LTCG) and short term capital gains (STCG) depending on the investment period.

How is idle cash calculated?

Idle cash is cash that is idle or not being used in a way to increase a business’value. It means that the cash is not earning interest. The calculation of simple interest is equal to the principal amount multiplied by the interest rate, multiplied by the number of periods.

How do I invest in overnight funds?

Overnight funds invest in reverse repo, CBLO, and other debt assets with a day maturity. Overnight funds earn through interest payments on their debt holdings. Since the funds invest in overnight securities, there is no scope for earning capital gains. They are the safest debt fund.

How do you manage idle money?

It is necessary to hold some amount of cash idle in a safe or checking account for regular and unforeseen expenses. However, the idea is not to hold too much. Instead, one should use techniques like forecasting and budgeting to minimize idle funds.

Why holding cash is bad?

The biggest risk in keeping too much cash on hand is the opportunity cost. Even when interest rates are higher, the real return on cash after taxes and inflation can be negative. Over the long run, only the equity markets have the potential to earn returns that outpace inflation.

Further Reading

  • The investment of idle public funds: a review of the issues – [PDF]
  • Income, Idle Funds and the Price of Real Estate in Modern Shanghai [J] – [PDF]
  • The economics of idle public funds policies: a reconsideration: a reply – [PDF]
  • The impact of financial intermediation on economic growth: The Nigerian perspective – [PDF]
  • Financial deepening and economic development of Nigeria: An empirical investigation – [PDF]
  • Finance, funding, saving, and investment – [PDF]
  • Financial analysts' forecasts of earnings: Their value to investors – [PDF]
  • A note on the alternative uses and yields of idle public funds – [PDF]
  • Economic consequences of applying Islamic principles in Muslim societies – [PDF]