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Financial Management and Business Data Analytics · Management of Cash and Cash Equivalents

Investment of Surplus Cash and Money Market Instruments

Updated 10 October 2026 · Fact-checked

Investment of surplus cash means parking idle funds in short-term, low-risk instruments until you need them. You choose among treasury bills, commercial paper, certificates of deposit and money market or liquid mutual funds by comparing safety, liquidity, maturity and yield, in that order of priority. Never chase yield at the cost of safety.

Understand Investment of Surplus Cash and Money Market Instruments

Firms often hold cash that is not needed immediately, for example tax money collected for a payment due in two months, or seasonal inflows. Idle cash earns nothing. Surplus cash investment puts it to work without risking the principal or being unable to withdraw it when needed.

The usual place is the money market, where instruments mature in up to one year. The main ones are:

  • Treasury bills (T-bills): short-term securities issued by the Government of India, with 91, 182 and 364-day maturities. They are issued at a discount and redeemed at face value. They carry practically no default risk and are very liquid.
  • Commercial paper (CP): unsecured promissory notes issued at a discount by strong, creditworthy companies. Yield is usually higher than T-bills because credit risk is higher.
  • Certificates of deposit (CD): negotiable deposit certificates issued by banks and eligible institutions at a discount. Safety depends on the issuing bank.
  • Money market or liquid mutual funds: pooled funds that invest in these instruments. You can start with small amounts and redeem at net asset value. Returns are not guaranteed, and some NAV movement can occur.

Other options include call or notice money (mostly for banks and primary dealers) and short-term bank deposits. Check the current rules for eligibility, minimum amounts and tenor before you state them in an answer.

The finance manager balances four things: safety (will I get the principal back), liquidity (can I sell or redeem quickly without loss), maturity (does it match when I need the cash) and yield (what do I earn). Yield is the last filter. A higher yield nearly always means more credit or liquidity risk.

The cash budget decides how much is surplus and for how long. A cash budget that shows a surplus for three months points to a 91-day instrument, not a one-year one.

Key rules to remember

Yield on a discount instrument (simple, not annualised)
Return for the period = (Face value − Purchase price) ÷ Purchase price
T-bills, CP and CDs are issued at a discount, so the gain is face value minus issue price. Divide by the amount you actually invest.
Annualised yield
Annualised yield = [(Face value − Price) ÷ Price] × (365 ÷ Days to maturity) × 100
Use 365 days unless the question says 360. This is simple annualisation. Use it to compare instruments with different maturities.
Discount rate (bank discount) basis
Price = Face value × [1 − (Discount rate × Days ÷ 365)]
When a question quotes a discount rate, the effective yield is higher than the quoted rate because the investment is the lower price.
Effective annual yield (compounded)
EAY = (1 + Period return)^(365 ÷ Days) − 1
Use only if the question asks for compounded or effective yield.
Selection rule
Safety → Liquidity → Maturity match → Yield
Rank in this order. Choose the highest yield only among options that pass the earlier tests.

How to solve Investment of Surplus Cash and Money Market Instruments questions

Use this for both theory questions on choosing instruments and numerical questions on yield.

  1. 1Read the cash budget or the case to find the surplus amount and how long it is idle.
  2. 2Fix the investment period and match it to maturity. Reject instruments that mature well after the cash is needed.
  3. 3Screen for safety. Government paper is safest, then bank CDs, then corporate CP, then funds depending on their holdings.
  4. 4Screen for liquidity: can you sell or redeem before maturity without a large loss or penalty.
  5. 5For numbers, compute the gain as face value minus price, divide by price, then annualise using 365 ÷ days.
  6. 6Compare yields only among the options that passed safety and liquidity.
  7. 7State the recommendation with a reason and mention the risk traded off, such as credit risk or reinvestment risk.

Quickest way: Four-filter shortcut

When to use it: For MCQs and short theory answers that ask which instrument suits a firm or which statement is correct.

  1. Note the tenor needed and match it to 91, 182 or 364 days.
  2. If the question stresses safety, pick T-bills. If it stresses higher return with acceptable credit risk, pick CP or CD.
  3. If it stresses small amounts, professional management or easy redemption, pick money market or liquid mutual funds.
  4. For yield numbers, use (Gain ÷ Price) × (365 ÷ days) and eliminate options with the wrong base, such as dividing by face value.

Common mistakes in Investment of Surplus Cash and Money Market Instruments

  • Dividing the gain by face value instead of the purchase price.

    Face value is the figure that stands out in the question.

    Fix: Money invested is the price paid. Always divide by price.

  • Forgetting to annualise when comparing instruments of different maturities.

    A 91-day return looks small next to a 364-day return.

    Fix: Multiply by 365 ÷ days before comparing.

  • Choosing the highest yield without checking safety and liquidity.

    Students treat the question as a pure return maximisation problem.

    Fix: Apply safety and liquidity first, then yield.

  • Saying commercial paper is risk-free like T-bills.

    Both are discount instruments with short tenors.

    Fix: T-bills are government securities. CP is unsecured and depends on the issuer's credit quality.

  • Stating that mutual fund returns are guaranteed.

    Liquid funds look like deposits.

    Fix: Say returns are market-linked and the NAV can move, though the risk is low for money market funds.

  • Mismatching maturity with the cash need.

    Students pick the best-yielding tenor.

    Fix: Match maturity to the date the cash is needed. Longer tenors add reinvestment and liquidity risk.

Worked examples

Example 1

A company has surplus cash of ₹97,500 to invest for 91 days. A 91-day T-bill with face value ₹1,00,000 is available at a price of ₹98,500. Calculate the return for the period and the annualised yield (365-day basis, simple).

Show the solution
  1. Gain = ₹1,00,000 − ₹98,500 = ₹1,500.
  2. Period return = 1,500 ÷ 98,500 = 0.015228, or 1.5228%.
  3. Annualised yield = 0.015228 × (365 ÷ 91).
  4. 365 ÷ 91 = 4.0110.
  5. 0.015228 × 4.0110 = 0.06108, or 6.11%.

Answer: Period return is about 1.52%. Annualised yield is about 6.11%.

Example 2

A treasurer must invest idle cash for 182 days. Option A: a 182-day T-bill priced at ₹97,000 for face value ₹1,00,000. Option B: commercial paper of a company priced at ₹96,500 for face value ₹1,00,000, same maturity. Compute the annualised yield of each (365-day basis, simple) and recommend one.

Show the solution
  1. Option A gain = 1,00,000 − 97,000 = ₹3,000. Return = 3,000 ÷ 97,000 = 0.030928.
  2. Annualise: 365 ÷ 182 = 2.00549. Yield = 0.030928 × 2.00549 = 0.06203, or 6.20%.
  3. Option B gain = 1,00,000 − 96,500 = ₹3,500. Return = 3,500 ÷ 96,500 = 0.036269.
  4. Annualise: 0.036269 × 2.00549 = 0.07274, or 7.27%.
  5. Extra yield of B over A = 7.27% − 6.20% = 1.07 percentage points.
  6. This extra yield pays for the credit risk of an unsecured corporate issuer.

Answer: T-bill yield is about 6.20% and CP yield is about 7.27%. Choose the T-bill if safety is the priority. Choose CP only if the issuer is highly rated and the company accepts credit risk for about 1.07 percentage points more.

Exam tips

  • In theory answers, name the four criteria: safety, liquidity, maturity and yield. Then apply them to the case.
  • Write the yield formula first, then substitute. Step marks go to the method.
  • State the day basis (365 or 360) you use if the question does not say.
  • For difference questions, use a short comparison: issuer, risk, maturity, how it is issued and who can invest.

Practice questions from Management of Cash and Cash Equivalents

Investment of Surplus Cash and Money Market Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investment of Surplus Cash and Money Market Instruments: frequently asked questions

What is the difference between treasury bills, commercial paper and certificates of deposit?

T-bills are issued by the Government of India and are the safest. CP is an unsecured note issued by companies with strong credit. CDs are issued by banks against deposits. All three are issued at a discount and redeemed at face value.

Which instrument is best for investing idle cash?

There is no single best one. For maximum safety and liquidity choose T-bills. For a higher return with some credit risk choose CP or CDs. For small amounts and easy redemption choose liquid or money market funds.

Why do T-bills offer lower yield than commercial paper?

T-bills have practically no default risk because the government backs them. CP investors bear the issuer's credit risk, so they demand a higher return.

Do I divide by face value or price to find yield?

Divide by the price you pay, because that is the amount invested. Then annualise by multiplying by 365 divided by the days to maturity.