What Is “Rotation Of Money” In Business?

In business, rotation of money refers to the movement of money from one economic sector to another. It may also be defined as moving investment assets from one sector to another. The sales of securities for a particular investment sector are used to purchase securities from other sectors. This process is used to capture returns from market cycles and diversify holdings. The strategy used for money rotation is quite tricky and a bit risky as the costs associated are high.

Many industries get involved in money rotation and are stuck forever. Notably, the Harshad Mehta scam worked similarly to this money rotation concept. He took money from one bank, and to repay it he again took a loan from another bank and this cycle continues. The concept of rotation of money is a starting point for many scams, including the Nirav Modi scam. Although if taken care of wisely, your business can get out of this tornado.

How does money rotation work?

Money rotation works on the idea that the economy operates in cycles. During a certain period of the cycle, some businesses tend to outperform others. For sectors like technology, utilities, energy, materials, healthcare, financials, etc., sector rotation strategically divides the economy. A typical business cycle has four stages of sector rotation: early recovery, recovery, early recession, recession.

• Early recovery: It is the stage where production is increasing and interest rates are decreasing. The sectors likely to perform better at this stage are agriculture industries, basic materials, and energy.

• Recovery: At this stage, the yield curve is flattened, but the consumer's expectations are decreasing. The sectors that profit includes energy, consumer, and services.
• Early recession: At this stage, production levels drop and the interest rate reaches its highest point; the overall economic scenario is at its worst. The least affected sectors are services, utilities, and transport.
• Recession: Consumer expectations hit rock bottom during this stage. GDP is adversely affected. It is a bad time for job seekers and businesses or those willing to start handicraft business plans or have import-export business ideas. The only sectors that profit is technology, transport, and industrials.

Importance of money rotation

Money rotation is necessary for any business venture. There is an increase in the liquid assets when the money is rotating. The interest and returns that you gain from money rotation can be used to reinvest in any business or shares, increase your sales, and plan your financial strategies. The rotation of money guides the investors from where they can generate profits by observing the business cycle. It gives a brief idea of which stocks to sell or buy based on their performance in the business cycle. It is analogous to an import and export business idea. For every export business plan idea, money is gained in terms of profit, which can be reinvested in the business for importing goods or services and investing in the stock market. Thus, the profits or interest earned increases the cash flow. Some good ways for money rotation are:

• Invest in fundamentally strong companies.
• Exit by taking profit even in the short term.
• Use the principal pool to invest in other such businesses while investing the profits in your business.
• Repeat this process.

Disadvantages of Money Rotation

Money rotation strategies pose a great risk and are not easy to manage because of their volatile nature. For extensive market trading, one needs to consider the potentially high cost associated with the money rotation leading to loss of returns. Money rotation is expensive due to commission and trading fees applied on moving the capital in and out of the sector. Money rotation does require a lot of effort in a thorough analysis of economic data and investments that are expensive. Money rotation strategies are beneficial for individuals with a high net worth, institutional managers, and professional portfolio managers.

Examples Of Rotation Of Money

Let’s discuss an example of an import and export business idea that involves money rotation. Suppose a crude oil exporter wants to import oil from the Middle East, and he borrows INR 1 crore payable in the next year from a wealthy friend. He gets the oil and starts selling it and could sell 70 lakhs worth by the year-end. However, he needs 30 lakhs more to repay the complete debt. Just say he gathers that 30 lakhs from another friend, now that he has INR 1 crore, he repays the first friend, but the debt is still not paid as he still owes the second friend. Now to repay the pending amount, he borrows 30 lakhs from others. This rotation of money keeps happening as long as you are in the business. And since it is a practice, it can be observed in any type of business taking place. It is commonly fair in export business plan ideas and other businesses such as handicraft export business.

Let’s discuss this process with regards to how to start a handicraft business at a local level.

To initiate a handicraft business, you must first collaborate with a local manufacturer and outsource the work. For the initial financing, you can use your savings or borrow from people or banks. Next, you can sell your products at the local haats or markets organised by the local administration. This is one such business where you can get trapped in the money rotation phenomenon when you keep borrowing money either from relatives or financial institutions. You can keep investing the surplus money and take returns on time.

Do you have any import-export business ideas? Check how to start the business:

First, plan out the in-demand product by researching the market and the place where you intend to sell it. Now connect the surplus state of production to these demanding states through your channel. There are licenses such as ICE and IGST required to start this business. Listed below are the documents that you will need for this business:

• Bill of lading
• Commercial invoice cum packing list
• Shipping bill/bill of export
• Bill of entry

After procuring these documents and licenses, plan the transportation and storage along with marketing. You can check the OKCredit article for more details on export business ideas.

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FAQs

Q. What is the money rotation model?

Ans. The money rotation model is the movement of money in stocks from one industry to another. It helps the traders and investors in predicting the next stage of the economic cycle.

Q. How is money rotation beneficial?

Ans. Money rotation is beneficial for the following reasons:

• To capitalise on growth in stocks and bonds, money rotation helps to position your investments accordingly while avoiding unfortunate periods of market decline.
• Money rotation uses a dynamic approach for asset allocation to generate maximum growth from stocks and bonds.

Q. Can money rotation strategies be used to manage my investments?

Ans. Yes, money rotation strategies can be used to manage your investments. Here's why:

• Every month, money rotation selects a class between bonds or stocks that are top performers. The model then shifts its investments accordingly.
• Due to its dynamic approach of allocation, it prevents you from any loss due to severe market declines.
• Money rotation strategies give you higher returns and reduce overall portfolio risk.

Q. How many exchange-traded funds (ETFs) does money rotation utilise?

Ans. Money rotation utilises two exchange-traded funds (ETFs):

• SPY: It is the largely and widely used ETF that provides exposure to S&P 500.
• AGG: It is the largest and extensively used bond ETF that tracks the Barclays U.S. Aggregate Bond Index.

Q. What is the approach used by money rotation for allocation assets?

Ans. The money rotation model uses the dynamic approach for the allocation of assets.