Sinking fund is a specific reserve set aside for redemption of a long term debt or the replacement of a wasting assets. The distinct feature of sinking fund is that the amount of it is invested in outside securities to earn the interest. The investment is collected before the use of specific purpose.
Advantages of sinking fund:
- There will be no problem of collecting funds for the purchases of new assets.
- Sinking fund is also created to repay the long term loan, therefore company will not face the problem of managing fund from outsiders.
- It can be invested in outside securities which will increase sum of reserve.
Disadvantages of sinking fund:
- A big amount of divisible profit is utilized for sinking fund.
- The fund may not fulfill its purpose if the invested amount has not been collected in time.