Investment options for Co-operative Banks and Societies
As per RBI Master Circular on Investments by Primary (Urban) Co-operative Bank and the recent amendment to the Indian Trust Act in 2017, Co-operative Societies can invest in many financial instruments.
Traditionally, the funds which are in excess of the loans given are invested in fixed deposits of other co-operative banks or nationalized banks. The interest rate received on those excess funds barely matches the interest cost that the bank pays to depositors.
After the recent amendment to the Indian Trust Act in 2017, co-operative societies can invest in specified mutual funds.
For simplicity, I have divided the deposits with a time horizon of 5+ years and less than 5 years.
1. Deposits with 5+ years time horizon
Only deposits with 5+ years' time horizon should be invested in equity. Purely from the perspective of value addition; co-operative societies should invest some part (e.g. 10%) of deposits in equity mutual funds. Co-operative banks cannot invest in equity. Co-operative banks can invest only in fixed income security of less than 1-year maturity.
Primary focus while evaluating in Equity Mutual Fund:
- Focus on International Diversification
- Focus on Protecting Capital
- Keep return expectation low in the range of 10-12%
- Transparency of the AMC/ Fund Manager
Out of 2500+ mutual fund schemes, there are very few schemes that meet the above criteria.
2. Deposits with less than 5 years horizon
Money kept in the current account anyway loses value due to inflation. Instead of keeping those deposits in the current accounts, these deposits should be parked in debt funds like liquid funds, overnight funds, where returns are in the range of 3-5% per annum.
These debt funds provide liquidity, safety, and returns as well.
Criteria for evaluating debt funds:
- Assets under management
- Ratings of the securities of the debt funds (Preferably AAA/ Sovereign)
- Duration of the underlying securities
- History and background of the AMC/ fund management team
If co-operative banks/ societies genuinely want to add value to the members of the society, they should not leave any stone unturned while evaluating investment opportunities.
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