Concept of Fund Management

The fund is a pool of money set aside for a specific purpose. In banks and financial institutions, It is required to perform different activities in an organization. In a simple sense, a fund is the cash held, used, and set aside for different pre-determined or contingency situations. Fund management is the act of arranging, regulating, and controlling funds. The act of fund management is crucial in banks and financial institutions too. In the context of BFIs, fund management is managing cash inflow and cash outflow meeting different objectives and obligations. It is concerned with managing cash flow to fulfill different necessary legal and business promises.

Banks and financial institutions manage or arrange funds from different primary and secondary sources. Primary sources include own money of BFIs in the form of share capital, retained earnings, reserves etc. A secondary source of fund is mainly the deposit collected through different saving, current and fixed deposit accounts. Such fund is used for different purposes. Fund collected is used for making payment of withdrawal orders, purchase of assets, investment in securities, loan and advances, maintenance of cash reserves, making administrative expenses etc. by BFIs. The act of facilitating such sources and uses of the fund is called fund management. Fund management is ensuring the availability of funds and their mobilization. Fund management is concerned with assets and liability management to settle their maturity. In precise, fund management in BFIs is the process or act of managing a fund ensuring it is neither excess nor short to meet the necessary obligation and grab competitive opportunities.

Types of Fund Management

IFund management is concerned with arrangement, use, regulate, and control funds for quality service and higher profitability. It is about ensuring the efficiency and effectiveness of funds during the banking business. There are the following types of fund management:

1. Corporate Fund Management: Corporate fund management is concerned with the management of cash inflow and cash outflow in an organization. It is the use of tools and techniques to manage the overall cash flow of an organization. Such fund management is performed by corporate fund managers to ensure optimum level of riks and return while mobilizing such funds.
2. Personal Fund Management: It is concerned with managing the fund of an individual. It is analyzing, allocating, investing, and recovering funds of such individuals in profitable and less risky ways. It uses smart tools and techniques to make such personal funds bigger, stable, and sustainable. Such fund is managed by personal fund advisors or personal investment planners.

Importance or Areas of Fund Management

Fund management is a crucial function in banks and financial institutions to ensure all the required obligations are met timely. It is important for effective fund mobilization in a profitable and less risky manner. Thus, fund management is regarded as significant activity in BFIs. The importance of fund management has been presented below:

1. Fund management is essential for liquidity management to avail adequate liquid funds and avoid excess or shortage of liquidity situation
2. Minimization of cost of a fund by bringing cheaper deposit to bank through different deposit schemes and effective fund mobilization
3. Profitability of bank and financial institutions can be improved or increased through effective fund management and reduced cost of fund
4. Fulfillment of obligatory needs of reserves as per directive issued by a central bank
5. Understanding schedule of maturity of assets and liabilities along with the impact on the liquidity position
6. Strategic planning on branch expansion, credit extension, and addition of new innovative  services in the banking system
7. Meeting customer expectations regarding a cheque and ATM payment as well as interest on the deposited sum
8. Control expenses, both revenue and capital, to contribute towards profitability through different investment and expenditure plans

Methods of Fund Management in Commercial Bank

Fund management determines the liquidity, assets-liability, and investment status of commercial banks. Its importance is such that it determines the operation as well as the profitability of the bank. Commercial banks use a different method for fund management. In commercial banks, the following methods are used for fund management:

1. Establishment of the fund management committee to look after the bank’s liquidity position, outstanding commitment (loan and LC) and the bank’s interest rate sensitivity position as well as net interest margin
2. Define and establish a record-keeping system for deposit review regarding the volume of stable or core deposits, volatility of deposits, the maturity of time deposits, deposit interest rate etc.
3. Formulation of borrowing policy clarifying when and under what condition bank can borrow, the maximum amount that can be borrowed, list of eligible creditors to borrow etc.
4. Determination of the type of investment that can be pursued as per the investment policy of the bank
5. Determination of the type of loan, a mix of loans, deposit to loan ratio, maturing loans, and their amounts etc. as per credit policy of the bank
6. Offset of borrowing and deposit by keeping fund in a liquid position
7. Setting and implementing contingency funds through curtailing lending activity with priority given to specific types of credit and establish lines of credit with other financial institutions will provide the fund on short notice
8. Proper handling of interest-sensitive assets and liabilities through the effective record-keeping system to track rate sensitive assets and liabilities
9. Setting maturity of rate-sensitive assets and liabilities having maturity period of 90 days or 180 days or 270 days or 360 days or above 360 days along with volume and insurance
10. Fund management with consideration for avoiding excessive tax burden while handling, deposit, borrowing, investment, and other activities of the bank