## Marketable Securities: Investment of Surplus Cash

### Why Marketable Securities Matter

Management of marketable securities is an integral part of cash investment because it serves both liquidity and cash needs — provided the right securities are chosen.

### The Logic

Working capital needs fluctuate through the year.
It is possible to invest excess funds in short-term securities during surplus periods.
These can be liquidated when cash is needed during shortage periods.
This earns returns on idle cash while preserving the ability to meet payments.

### Three Principles for Selecting Marketable Securities

#### 1. Safety

Return and risk go hand in hand.
Since the objective is ensuring liquidity, minimum risk is the criterion.
Examples: Treasury bills, short-term government securities, AAA-rated commercial paper.

#### 2. Maturity

Match maturity with forecasted cash needs.
Long-term security prices fluctuate more with changes in interest rates → more risky.
Use short-dated instruments aligned with the cash budget.

#### 3. Marketability (Liquidity)

Refers to convenience, speed, and cost at which a security can be converted into cash.
If a security can be sold quickly without loss of time and price, it is highly liquid/marketable.

### Memory Aid: SMM — Safety, Maturity, Marketability

Worked example

### Example 1

Decision Example: Treasurer has ₹50 lakh surplus expected to last 45 days.

✗ A 5-year corporate bond — wrong maturity, high price risk if rates rise.
✗ Equity shares — too risky, fails safety.
✓ 30-day Treasury bill rolled over — safe, matched maturity, highly marketable.

⚠️ Common exam mistakes

Choosing high-yielding but risky securities — violates the SAFETY principle.
Buying long-dated bonds for short-term surpluses — violates MATURITY matching.
Investing in thinly-traded paper — violates MARKETABILITY.
Forgetting that marketable securities management serves BOTH liquidity AND return.

Reference:

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Marketable Securities — Selection Principles

Worked example

⚠️ Common exam mistakes