Idle Funds

Idle funds are money without any use or purpose; the money is not used for business or investment and doesn't appreciate or grow.
What are Idle Funds?
3 min
14-May-2024

Idle funds are money that hasn't been invested, meaning it's not making any interest or investment profits. Basically, it's money not in any interest-earning or investment-tracking accounts, so it's not part of the economic market action.

To understand it in other way, If you have a substantial amount of cash lying around and are not sure what to do with it, then that money at the present moment is idle cash for you.

If your money is not growing, building wealth, or generating returns, it falls under idle funds.

In this article, we will understand idle funds, see how they work, and look at their pros and cons so you can make informed decisions.

What is idle fund?

Idle funds as the name suggests are funds that do nothing - they are neither invested, nor do they earn any returns. Simply put, idle funds do not partake in the economic activities of the market.

They are also known as idle cash or idle money, while some call them wasted funds since they are not being put to use and are neither appreciating in value.

understanding an idle fund with an example

Individuals, businesses, or governments may keep idle cash on hand for strategic reasons or any near-future use. However, if you have idle funds and are unaware, you could be missing out on a chance to let your money grow in value.

For example, consider an individual who wants to buy a home in the short term and keeps adding money to his idle fund to get the down payment amount ready. The cash here is not invested in any financial instrument but is kept ideal for a specific purpose.

But what gives idle funds a bad rep is the fact that they decrease in value over time as inflation grows. In such instances, it is advisable to deposit your money in short-term interest accounts or money markets that help maintain liquidity while generating returns.

But at the same time, it is also important to not always invest all your money and keep some idle for any unplanned expense or emergency.

How do idle funds work?

The paradox of idle funds is that they work by not working in your favor. Every time you go and deposit money into investment, savings, or money market instruments, you are giving it the scope to grow. You earn through interest, returns, or dividends.

The effects of compounding come into play and with the snowball effect what you get after a given time frame will be more than you invested.

For example, consider a scenario where you invested 1 lakh rupees for a 6.5% interest rate in a savings account for 12 months. After a year you would earn 6500 rupees as interest as opposed to keeping the same amount of money in an idle fund.

what is value of idle funds?

Money kept in an idle fund will not generate any return but also lose its value due to inflation which rises every year.

Money left in an account that doesn't accrue interest—or perhaps just kept at home in a drawer—remains static. Without being placed in an interest-accruing environment, idle funds miss out on the magic of compounding.

Real-life examples of idle funds

Here are a few common scenarios where idle funds are not deployed actively and they end up not generating any returns:

  1. Savings accounts that barely pay any interest
    It is quite common to see people keep money in savings accounts that hardly pay 3% or 4% returns. In most cases, this return is much lower than the inflation prevalent. As a result, people lose money even though better options are always available in the market.
  2. Not renewing fixed deposits after they’ve matured
    Some individuals hold their savings in fixed deposits that have matured but haven't been renewed or reinvested. This money often sits as idle funds in the associated savings account, earning minimal interest rather than being put back into a higher-yielding fixed deposit or other investment.
  3. Unclaimed provident fund balances
    There are significant amounts of unclaimed balances in provident funds due to various reasons such as job changes where employees do not transfer or withdraw their provident fund balances. These funds are essentially idle as they are not claimed by the account holders.

Benefits of idle fund

Although idle funds are more often than not seen as lost opportunities, they come with their fair share of benefits:

  1. Idle funds mean high liquidity. Since they are kept in cash, they can easily be used by individuals and businesses for unexpected expenses or to gain advantage of any immediate investment opportunity.
  2. If you have idle funds at home, it means you are not paying banks or financial institutions, processing or transaction fees to handle your money.
  3. Sometimes, keeping funds idle can be strategic, especially if you are anticipating a market correction or waiting for the right investment opportunity.
  4. During periods of economic instability, idle funds provide a lot of safety since they are less exposed to market volatility.

Disadvantages of idle funds

  1. The biggest con of idle funds is the opportunity cost that is associated with not investing them. Idle cash does not contribute to building wealth and generating any returns, so there is no significant increase in wealth over time.
  2. As inflation increases, the real value of money decreases i.e.it will buy less in the future than it does today. Hence the same amount of money will lose its purchasing power over time.
  3. If you keep all your money in idle funds you miss the benefits of compounding.
  4. Maintaining all your money in idle funds means that you are not actively pursuing any financial objectives.

Conclusion

Be it an individual, organization, or government, idle funds can serve as the reserves that can help you seize opportunities as and when they arise.

But at the same time mitigating losses that arise due to the absence of investment growth and compounding, and decrease in purchasing power should be addressed. By balancing the need for immediate accessibility with the benefits of investing, you can effectively navigate your financial journey to build and preserve wealth over time.

Mutual Funds provide a practical solution for putting idle funds to work and diversifying your portfolio. With the Bajaj Mutual Fund Platform, you get access to multiple tools, from an online lumpsum calculator to a SIP calculator, intending to make mutual fund investment planning easier.

The Bajaj Finserv Mutual Funds Platform, helps you learn how to choose mutual funds and compare with over 1,000+ schemes - making it the ideal place to begin your investment journey.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

What is the meaning of idle fund?
An idle fund refers to money that is not currently invested or earning interest, often sitting in cash form or in a low-interest account, thus not actively contributing to financial growth or goals.
What is an idle fund in a bank?
An idle fund in a bank refers to money that is kept in accounts earning minimal or no interest, and not being actively invested to generate returns.
How do you manage idle funds?
To manage idle funds, invest them in higher-yield options such as money market funds, bonds, or mutual funds, and regularly review investment strategies to maximize returns.
What is the benefit of idle?
The benefit of having idle funds is increased liquidity, allowing quick access to cash for unexpected expenses or immediate opportunities without the risk of market fluctuations.

What is the best option for me to activate idle funds?
To activate idle funds effectively, consider investing in mutual funds, high-interest savings accounts, or bonds to optimize returns and manage risk.
Can idle funds ever improve your money?<br><br>
Idle funds generally do not improve your money because they earn little to no interest and do not benefit from investment growth or compounding effects.
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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.