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Investment is the placement of a company's surplus liquidity either in the financial markets or the use of the excess liquidity internally within the company. The main objective of investment is to improve the return on the surplus liquidity over leaving the monies in a non-interest bearing bank account. However, investment decisions are not simple and mostly involve a balance between many different variables. The three main criteria when evaluating investments are typically: first, how secure is the investment, i.e. what is the risk that the principal will not be recoverable; second, the liquidity, the accessibility of the investment, i.e. how quickly can the investment, the instrument be realised for cash if required; and third, what is the return, the yield from the investment. Alternatively, to put it another way - the return 'OF' your monies is far more important than the return 'ON' your money will always be much more important than Yield. The basics of investment are very simple:

  • the level of risk in an investment is always reflected in the rate of return offered
  • liquidity, particularly in today's credit crunch, is just as important as market, credit and operational risk
  • cash should not be left with main relationship banks or custodians by default unless the amounts are minimal or very transitory
  • management of investment risk needs continual professional commitment, it is not a part-time job.

Investment policy for corporate treasury departments is mostly set by the board or a committee of senior management who specify the investment decision criteria, the acceptable instruments, maturities, currencies and counter-parties. Often the policy will state which banks can be used and the limits for each bank and type of instruments, and whether investment portals can be used.

Investing is a five step process requiring many different types of information, assessment tools, and administration:

Source and Copyright© 2012 J&W Associates 

This figure shows the importance of cashflow forecasts and the liquidity management systems to understand and identify liquidity surpluses. Only when these surpluses have been identified can any investment be made.

Types of Investment
There are three types of investment: short-term which includes operational cash (daily or overnight) and 1-30 day investments, medium term 1-9 months investments, and long term, strategic investment, which can be for periods of many months to many years. The banks and financial markets have for many years offered a huge range of commercial instruments covering each type of investment. An important alternative to the commercial investments is now emerging the, so called, responsible investments, e.g. green investments.

Flight to Quality and the Optimal Mix
In today's post credit crunch the choice of investment instruments and counter parties is now driven much more by the preservation of capital and the safety of the fund or bank, and then ease of access to liquidity rather than a bank's or fund's yield. So it is not surprising that there has been a flight to quality and that the majority of corporate short-term investments today are increasingly with the safer banks and funds. Nevertheless, ultimately, there is no complete guarantee and an AAA credit rating does not guarantee absolute security, so corporate treasurers are now not only monitoring the credit rating of the funds and their banks; they are also monitoring the bank credit default swap spreads as an early warning of potential credit concerns.

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