Some liquid funds borrow from the market to meet redemptions, instead of selling underlying securities. So, the declared expense remains lower
What happens if your mutual fund scheme is faced with redemptions? Ideally, it should sell its existing securities, generate cash and pay that to investors. But mutual fund industry experts tell Mint that many liquid funds manage their redemption in an ingenuous way—by borrowing money from the market to meet their redemptions, instead of selling their underlying securities; a practice that goes against the principles laid out by the Securities and Exchange Board of India (Sebi) mutual fund regulations. Investor returns do not get hit here, but this practice shows tricks by which mutual funds try to pump up returns, even if artificially. Should you be worried?