InvestorQ : What is a sinking fund and how is it beneficial for an investor or a company?
Sneha Balasubramanian made post

What is a sinking fund and how is it beneficial for an investor or a company?

Answer
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Isha Tharwani answered.
3 months ago


A sinking fund is a type of fund that a person specifically creates to repay debt. The owner of the sinking fund account set aside a fixed amount regularly and uses it only for the purpose for which it is created or in case of emergency. This fund is generally used by corporates for deposits money accepted and bonds to buy back issued bonds or any part thereof before the date of maturity. Corporates/ Companies use this fund to convince investors that their money shall be repaid and the issuer will not default.

Just like corporates any individual or investor could use sinking funds in their daily lives for setting aside some money in case they have taken any loan. This way they can make sure that no default happens and they could be able to repay their debt on time. One can also use the sinking fund in case any emergency arrives.

The benefits of a sinking fund can be:

Stable finances: It is not necessary that the economic situation of any individual/company would be the same all the time, therefore by maintaining a sinking fund, one can ensure that timely debt re-payments are made. This results in financial stability for the individual and better credit rating for the company.

Lower interest rates: If a company maintains a sinking fund, the chances that it could attract investors at lower interest rates.
Brings in investors: Investors are aware that companies or organizations with higher debt are potentially risky. However, establishing a sinking fund would give them an indication that the company could be able to repay their debts. Investors would be secured for their debt repayments by the company.