Earlier this year, the Securities and Exchange Board of India (SEBI) announced new guidelines for instant Mutual Fund withdrawals. In this article, we will discuss five key investor takeaways on the guidelines.
Mutual Funds were offering instant redemptions for a number of funds a year ago. These were mostly debt funds. As you might know, it takes a day or two (depending on the type of Mutual Fund) for investors to redeem their funds and get the redemption amount in their bank accounts if you use the usual route. However, some fund houses started offering instant redemptions in a bid to attract investors. In April 2017, the Securities and Exchange Board of India (SEBI) announced new guidelines for instant Mutual Fund withdrawals. As per the new guidelines, investors will be able to get the money into their accounts instantly, subject to limits.
In this article, we will discuss five key investor takeaways on the new guidelines.
Additional Reading: 10 Benefits Of Investing In Mutual Funds
Guidelines applicable to only Liquid Funds
The instant redemption facility was initially provided by Reliance Mutual Fund and DSP BlackRock for their debt funds. Soon, other AMCs followed suit. This facility was offered for short-term debt funds. According to the new guidelines, SEBI has said that the instant redemption facility should be provided only for Liquid Funds.
Liquid Funds are short-term debt funds that are often used to park surplus cash because these funds come with low risks. The fund managers of these funds invest in securities that usually have a maturity period of 90 days or less. Since Liquid Funds have no exit load and are for the short term, instant redemption will be useful to investors.
Additional Reading: Why Liquid Funds Are A Better Bet In This Falling Interest Rate Era
Instant withdrawal is limited to a few funds
This facility is not available for all schemes. Fund houses offer instant redemption only for select Liquid Fund schemes. For example, Reliance’s Money Manager Fund is one of the schemes for which instant redemption is offered. Before redeeming your fund, please do check with your fund house if your Liquid Fund comes with the instant redemption facility.
Redeem after closing hours too
The redemption can be done even after the market closes. This is a big relief for many investors who have no time to redeem their funds during market hours. Earlier, Liquid Funds redeemed after 3 PM on a working day would be deposited into the account only on the next working day. The option to redeem even after market hours gives investors another reason to park money in Liquid Funds instead of bank deposits or Savings Accounts.
Limits on withdrawal
The instant withdrawal limit was Rs. 2 lakhs a day, or 95% of the invested value (whichever is lower) when the facility was launched by a few AMCs. Liquid Funds invest in bonds, deposits, and fixed-income securities having short tenures. SEBI displayed its concerns for the instant redemption facility, as any bad press, prospects of default, actual instances of default, or a rating downgrade may invite many instant redemption requests, which could prove problematic for both the investor as well as the fund house. To minimise the risks associated with such situations, SEBI has revised the withdrawal limit to Rs. 50,000 or 90% of the value of the Liquid Fund, whichever is lower.
Additional Reading: Liquid Funds or Savings Accounts – The Liquid Funds Perspective
Liquid Funds better than deposits
Earlier Liquid Funds were said to be similar to Fixed Deposit schemes due to similar rates of return. However, in case of Fixed Deposits, you will have to pay a withdrawal penalty for premature withdrawals. There are typically no exit loads in case of Liquid Funds. You can redeem them instantly.
Liquid Funds can even be compared to Savings Accounts due to their instant redemption feature. Banks typically offer around 4% interest. Many Liquid Funds have a long-term Compounded Annual Growth Rate (CAGR) of 8%. As per the CRISIL AMFI Liquid Mutual Fund Performance Index for March 2017, the fund category has a CAGR of 8.53% in the preceding five years, and 7.80% over 10 years. In the preceding year, it had returned 7.20%.
It is important that you compare across Liquid Funds to ensure that you choose the one that fits your requirements. Ready to invest?