A corpus fund is a consolidated pool of money or investments managed for a specific purpose or organisation, often dedicated to long-term sustainability or funding specific initiatives. For example - if there are 100 units in an equity fund, each valued at Rs. 10, the total corpus of the fund would amount to Rs. 1,000. If a few additional investors inject another Rs. 300 into the fund, the corpus would then increase to Rs. 1,300. Asset management companies (AMCs) oversee the investment and management of corpus funds, ensuring optimal returns and risk management strategies.
What is a Corpus fund?
Corpus funds typically originate from donations designated as corpus contributions. A donation is classified as a corpus donation only when accompanied by a specific written directive from the donor. In the absence of such written instructions, a contribution or grant cannot be allocated to the corpus fund. However, it's important to note that the corpus fund operates as a closed fund, devoid of any restrictions or obligations for future use, at least in practical terms.
It's crucial to understand that while the funds within a corpus fund are constrained, the purposes to which they can be applied are not limited. The corpus fund constitutes an unrestricted and permanent financial reserve. The constraint lies in the utilisation of the fund itself rather than the nature of its usage. Under rare circumstances, such as when the survival of the NGO is jeopardised, the corpus fund may be tapped into. However, such decisions are infrequent and ideally should be ratified during general meetings.
Systematic Investment Plans (SIPs) offer investors a disciplined approach to gradually contribute to corpus funds, allowing for long-term wealth accumulation through regular investments.
It's pertinent to emphasise that there are no legal impediments to utilising corpus funds for charitable endeavours.
Sources of Corpus Fund
Corpus funds, vital for the operational sustainability of a company or organisation, derive from various channels, each contributing to the financial backbone essential for conducting activities effectively.
- Shareholders: As the proprietors of a company, shareholders play a pivotal role in furnishing corpus funds, primarily through their investments. These investments constitute the principal source of capital for most enterprises. Shareholders encompass a diverse array of entities, ranging from individuals to institutions and other corporations. Their collective contributions provide the financial foundation necessary for initiating and sustaining organisational endeavours.
- Donations: Particularly significant for non-profit or charitable organisations, donations serve as another substantial wellspring of corpus funds. These contributions may originate from individuals, corporations, or other entities driven by philanthropic inclinations. By channelling these contributions towards the corpus fund, organisations bolster their capacity to execute initiatives aimed at societal welfare or addressing specific causes.
- Government grants: In certain scenarios, governmental entities also serve as a vital source of corpus funds, particularly for companies engaged in public projects or deemed strategically significant to the nation. Government grants provide a crucial injection of capital, facilitating the execution of projects with broader societal implications. These funds are instrumental in propelling initiatives that contribute to economic development, infrastructure enhancement, or other public goods.
Corpus funds, indispensable for the operational continuity and pursuit of objectives by companies and organisations, underscore the significance of robust financial support. While the origins of corpus funds may vary based on the nature and objectives of the entity, shareholders, donors, and government grants emerge as the primary conduits through which these essential resources are acquired and utilised.
Also read: What is mutual fund
Uses of Corpus Fund
Below mentioned are the uses of corpus funds:
- Investment opportunities: Corpus Funds serve as a reservoir for investments, channelling resources into various financial instruments like stocks, bonds, real estate, or mutual funds. The selection of these instruments is contingent upon the organisation's risk appetite and financial goals. Subsequently, the returns yielded from these investments become instrumental in fuelling the organisation's operations, thereby facilitating the sustained growth of the fund over the long term.
- Capital expenditure: Corpus funds can be strategically deployed for capital expenditure endeavours. This includes ventures such as the construction or renovation of infrastructures, procurement of equipment, or expansion of existing facilities. Leveraging the returns generated from the corpus, organisations can undertake these ventures without depleting the principal amount, thus safeguarding the fund's endurance and viability.
- Program support: Nonprofit entities often spearhead various programs and initiatives requiring consistent financial backing. Corpus funds in finance provide a reliable stream of financial support, ensuring the continuity and effectiveness of these programs. This steady infusion of funds enables organisations to sustain their operations, pursue their mission, and effect positive change within their communities.
- Emergency reserves: In the face of unforeseen crises or emergencies, organisations must have swift access to financial resources. Corpus Funds serve as a bulwark in such exigencies, furnishing organisations with the necessary liquidity to navigate through turbulent times without compromising their core objectives. This emergency reserve ensures organisational resilience and stability in the face of adversity.
Also read: What is Fund of Funds (FOFs)
Advantages of Corpus Funds
Listed below are some advantages of corpus funds:
Financial stability:
- Corpus funds serve as a dedicated pool of resources set aside for specific purposes.
- They act as a financial cushion, safeguarding organisations or individuals from unforeseen financial challenges.
- In times of revenue decline or financial distress, corpus funds can cover essential expenses, ensuring the continuity of operations without resorting to drastic measures.
Opportunity utilisation:
- Corpus funds enable organisations or individuals to capitalise on advantageous opportunities as they arise.
- In instances where discounted purchases or investments present themselves, corpus funds can facilitate swift action without relying on external financing.
- This flexibility allows entities to seize opportunities for growth, efficiency enhancement, or cost savings, ultimately contributing to long-term financial health.
Mitigation of unexpected expenses:
- Corpus funds offer a buffer against unexpected expenditures, mitigating the impact of unforeseen events.
- When faced with sudden repair or maintenance costs, corpus funds can be utilised to cover these expenses promptly.
- By proactively addressing unexpected financial burdens, organisations or individuals can prevent disruptions to operations and avoid accruing debt or financial strain.
Also read: What is Equity Mutual Fund
Disadvantages of Corpus Fund
Listed below are some disadvantages of corpus funds:
Illiquidity:
- One significant drawback of investing in a corpus fund is the lack of liquidity.
- Investors are often bound by the investment term, restricting access to their funds until the maturity date.
- This limitation can pose challenges, especially in emergencies or when immediate access to capital is required, as the invested funds cannot be readily liquidated.
Reduced returns:
- Another disadvantage pertains to the diminished returns received by investors.
- Despite the initial investment, the returns obtained from the corpus fund may be lower than anticipated due to various factors, including hidden fees and charges.
- These deductions, often overlooked initially, erode the overall value of the investment, resulting in a reduced payout upon maturity.
Inflationary pressures:
- Corpus funds may struggle to keep pace with inflation, presenting a significant concern for investors.
- The returns generated by the fund may not be sufficient to counteract the effects of inflation adequately.
- As a result, investors may find their purchasing power diminished over time, necessitating higher returns to maintain the real value of their investment.
Establishment of Corpus Fund
The establishment of a corpus fund can instill financial discipline and accountability within an organisation. By allocating a portion of its resources to this fund, the organisation showcases its commitment to prudent financial management and long-term foresight. This fosters trust among donors, investors, and stakeholders, potentially attracting additional funding.
However, setting up a corpus fund demands meticulous planning and oversight. Its investment strategy must be crafted and monitored vigilantly to ensure optimal returns while mitigating risks. Moreover, a robust governance framework is essential for transparency, accountability, and safeguarding stakeholders' interests.
Tax implications also merit careful consideration when initiating a corpus fund. Depending on the organisation's legal structure and jurisdiction, there may be specific tax considerations. Seeking advice from financial experts or tax professionals ensures compliance with relevant laws and regulations throughout the establishment and management of the fund.
Conclusion
A corpus fund serves as an investment vehicle dedicated to financing a predefined objective or endeavour. This fund aggregates contributions from a diverse pool of investors, pooling their resources to be deployed across a spectrum of assets. Primarily, the corpus fund aims to furnish capital for distinct projects or goals, exemplified by initiatives like constructing a new factory or funding research and development for innovative products. Oversight of the fund's investments rests with a cadre of seasoned professionals, tasked with deploying capital judiciously to optimise returns for the investors.
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Disclaimer:
Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.
The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.
