The Sebi-mandated move by funds to levy exit load on investors who exit the liquid funds within seven days of their investments will make liquid funds unattractive.
The Securities and Exchange Board of India (Sebi) in a circular on Friday had announced risk management framework for liquid and overnight funds. Market participants believe that announcements like investing 20% of its net assets in ‘liquid assets’ will make liquid and overnight funds more stable, but returns would come down in both the fund categories. The Sebi-mandated move by funds to levy exit load on investors who exit the liquid funds within seven days of their investments will make liquid funds unattractive.
The market regulator said that liquid funds shall hold at least 20% of its net assets in liquid assets and liquid funds and overnight funds shall not park funds pending deployment in short term deposits of scheduled commercial banks and this provision shall be effective from April 1, 2020. Liquid assets shall include cash, government securities, T-bills and Repo on government securities. Mahendra Kumar Jajoo, head – fixed income at Mirae Asset Global Investments (India) says, “This move will obviously improve liquidity and safety in the liquid funds it will lead to lesser volatility in case sudden redemption. But at the same time returns profile may become more volatile.”
Currently liquid funds invest in several money market instruments like commercial papers, commercial bills, treasury bills and certificate of deposits among others but there are no cap on investments. “In case, the exposure in such liquid assets falls below 20% of net assets of the scheme, the asset management company (AMC) shall ensure compliance with the above requirement before making any further investments,” said Sebi in its circular. The data from Association of Mutual Funds in India (Amfi) shows that liquid funds have average assets under management (AAUM) as on August was Rs 5.49 lakh crore. While the AAUM for overnight funds stood at Rs 20,717.54 crore.
Sebi also announced cut-off timings for applicability of net asset value (NAV) in respect of purchase of units in liquid and overnight funds has been changed to 1:30 pm. instead of 2:00 pm.