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You might have to switch funds if you had invested to avail instant redemption facility

LiveMint logoLiveMint 01-05-2017 Kayezad E. Adajania

If you had invested in a liquid-type fund, thinking that you will avail the instant redemption facility, you might have to switch schemes. Most fund houses have been offering this facility on their ultra short-term funds.

However, the capital market regulator, Securities and Exchange Board of India (Sebi), took a decision in its board meeting on 26 April that only liquid funds can now offer instant redemption facility.

Over the past 1 year, at least five fund houses—Reliance Nippon Life Asset Management Ltd, DSP BlackRock Investment Managers Pvt. Ltd, SBI Funds Management Pvt. Ltd, ICICI Prudential Asset Management Co. Ltd and UTI Asset Management Co. Ltd—had started offering instant redemption. Though liquid funds give your money back the next day, some fund houses were offering redemptions in a matter of minutes, thanks to technology.

But all fund houses, except UTI’s asset management company (AMC) , offer this facility on their ultra short-term funds. UTI AMC offered it in its liquid fund: UTI Money Market Fund.

According to Sebi’s definition, liquid funds can invest only in securities that mature up to 91 days. Why then did most fund houses offer instant redemption in other funds? Ultra short-term funds (the schemes in which other fund houses offer this facility currently) have the potential to earn higher returns as they invest in longer-maturity scrips. Liquid funds, typically, have their average maturities at around 20-30 days. The downside, though, is that an ultra short-term fund’s risk profile goes up as it is more prone to volatility, compared to a liquid fund. Industry officials say that this could be one reason behind Sebi’s move.

That’s just one side of the story. The capital market regulator also said that if you are availing the instant redemption facility, you will get money at either the previous day’s or the next business day’s net asset value (NAV), whichever is lower. So far, you got your money at the next business day’s NAV.

Assume that you opt for instant redemption on a Friday, after 3pm (the cut-off time that determines whether you get money at the same or next day’s NAV). In this case, you will get your money instantly (on Friday itself, in minutes) but as per Monday’s NAV. You could then use this money (that you get on Friday) and immediately invest in a liquid fund at Friday’s NAV. Remember: in a liquid fund, if you invest before 2 pm, you will get the previous day’s NAV and after 2pm, the same day’s NAV. In this example, you will get to invest at Friday’s NAV.

In other words, you could earn money in both liquid fund as well as ultra short-term fund over the weekend, with the same corpus. Sebi has plugged this loophole.

At present, fund houses that offer instant redemption facility allow you to withdraw typically around Rs2 lakh a day or about 90% of your folio’s value, whichever is lower. Sebi has capped this limit to Rs50,000 a day or 90% of your folio’s value, whichever is lower. It has also clarified that fund houses should put in place a mechanism in such a way that they should not borrow money to meet such redemptions. How fund houses will do this, remains to be seen since the more cash a scheme keeps, the lesser returns it stands to earn.

Sebi is likely to issue a circular soon, which should make things clearer. An equal standard across all fund houses is good for you.

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