Risk-averse retail investors will now find investing in liquid funds of mutual fund houses more attractive as the markets regulator has now allowed fund houses to offer instant redemption facility. It can be availed by only retail investors, and not corporates or high net worth individuals (HNIs). Asset management companies (AMCs) will offer instant redemption of Rs 50,000 or 90 % of the folio, whichever is lower, in liquid funds. Securities and Exchange Board of India (Sebi) has mandated that fund houses cannot borrow money to offer instant redemption and it will have to be provided out of the available funds from the scheme.
With this change, it makes sense for investors to shift money from savings account to liquid funds as most savings accounts offer only 4% rate of interest whereas liquid funds yield higher returns. A few fund houses such as Reliance Mutual Fund, DSP BlackRock Mutual Fund, Birla Sun Life Mutual Fund, SBI Mutual Fund offer instant redemptions from their liquid schemes up to Rs 2 lakh a day. The regulator has now mandated that such schemes which are currently providing instant redemption facility will have to reduce the limit to Rs 50,000.
Sundeep Sikka, ED and CEO of Reliance Mutual Fund, says studies have shown that investors feel liquidity as one of the key barriers to investing in mutual funds. “Sebi has solved one of the key barriers faced by investors and it will help to increase the penetration of mutual funds,” he says.
Surplus money in liquid funds
Liquid funds are ideal to deploy surplus money for a short period of time—even overnight—without losing any liquidity. The money is invested in quality paper with adequate liquidity in the market. Liquid funds—that can only invest in bonds maturing on or before 91 days —and ultra short term funds —that have investment time frame of 6-12 months—would typically generate returns marginally higher or in line with short term interest rates like those available on bank fixed deposits. They are ideal for an investment horizon of up to 12 months.
At present, money from redeeming liquid funds is credited to the investor’s bank account the next day and in case of equity funds, after three days. So, in case after redemption the money is parked in savings bank account, it can be invested in liquid mutual fund in which the redemption will be credited in the same day.
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Will draw retail investors
Instant redemption of Rs 50,000 will help investors to take out funds in case of any emergency. Brijesh Damodaran, managing partner of BellWether Advisors LLP, says quick redemption of 90% of the corpus or Rs 50,000, whichever is lower, in liquid funds is an encouraging step to make the money work more as an investor can get the money back in an emergency at a very short notice. “It will also encourage more investors who are not investing or sitting in the fence, to test the mutual fund space, get accustomed to it and then invest in mutual funds,” he says.
Similarly, Joydeep Sen, managing partner, Sen & Apte Consulting Services LLP, a debt fund expert says, mutual fund products, particularly liquid funds, are compared with bank deposits. “One aspect where bank deposits score over liquid funds or other money market funds is instant, i.e., same day redemption. This facility in liquid funds will enable investors to manage cash flows better. Since bank fixed deposits are not available for a tenure less than seven days, investors will be able to reap higher returns for very short periods by managing their cash flows.” he says.
From a taxation perspective, short term capital gains from debt funds (on units held for 36 months or less) are taxed based on the investor’s income tax bracket whereas dividends are taxed at 28.84%. Interest on bank deposits is taxable at the investor’s marginal slab rate. Taxation-wise, bank deposits would be better only if one is in a lower tax bracket of 20% (Rs 5-10 lakh per year) or 5% (Rs 2.5-5 lakh per year).