The sinking fund can be defined as the fund which is kept in a separate account to be used for major expanses. In general parlance, a Sinking Fund is money set aside in a separate account to pay off a debt, a way to generate funds for a depreciating asset, to pay off a future expense or repay long-term debt. It is a financial technique of ensuring that a monetary lack does not arise causing any hardships in case of insufficient funds. In other words, it literally saves an organized legal entity from ‘sinking’ in debt.
With respect to co-operative housing societies, a sinking fund is to be generated in specific ways and used for a particular purpose. While a housing society is expected to set aside other funds such as Reserve Fund, Repair and Maintenance Fund, Education and Training Fund, a Sinking Fund is to be utilised when structural repairs are needed. When a reconstruction/alteration, heavy repairs or additions need to be carried out (with inputs, guidance and opinion of the Architect), the Sinking Fund kicks in as a go-to fund. Such decisions are discussed, negotiated and approved during general body meetings after inviting feedback and opinions from the members of the society.
Calculate Sinking Fund:
Sinking fund is created from the time of society formation, Though the need for reconstruction is not immediate and it might be years before any structural changes are required. But when the time arises the costs would be huge. Hence it recommended to have a sinking fund from the start so that it has enough time to grow over the years.
As per the state by-laws the sinking fund contribution is to be calculated as per a fixed percentage of the cost involved for reconstruction of a flat. The same is to be calculated per sq.ft. and multiplied by the size of apartment. These calculations should be done in consultation with an Architect as other factors like growth of property prizes and common areas need to be validated.
Sinking fund calculation and collection procedures might vary from society to society and region. However, the need of having a sinking fund can’t be ignored. This must be done with proper discussions and help from the experts.
Advantages of sinking funds:
1. Brings in investors
Investors are very well aware that companies or organizations with a large amount of debt are potentially risky. However, once they know that there is an established sinking fund, they will see a certain level of protection for them so that in the case of a default or bankruptcy, they will still be able to get their investment back.
2. The possibility of lower interest rates
A company with poor credit ratings will find it difficult to attract investors unless they offer higher interest rates. A sinking fund offers alternative protection for investors so that companies can offer lower interest rates.
3. Stable finances
A company’s economic situation is not always definite, and certain financial issues can shake its stable ground. However, with a sinking fund, the ability of a company to repay its debts and buy back bonds will not be compromised. This results in good credit standing and confident investors.