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Home / Opinion / Online-views /  Does change in liquid funds’ face value matter?

In February, IDBI Ultra Short Term Fund changed its face value to 1,000, up from 10 earlier. In January, three liquid and ultra short-term funds—six of their “plans" in all; retail, institutional and so on—from SBI Funds Management Ltd did the same thing. According to data provided by Value Research, a mutual fund (MF) tracking firm, a total of 51 plans/sub-plans/options of liquid funds and ultra short-term schemes have changed their face values to 1,000 or 100, up from 10 earlier, in the past one year.

These are changes that take place overnight—fund houses just give out an advertisement in an English newspaper—and you don’t even get a chance to redeem your money if you wish to do so. But is a change in face value such a big thing after all?

The curious case of decimals

“At times when investors get their account statements, the gains are not visible there, although your liquid fund has made some gains in reality," says Nandkumar Surti, chief executive officer, JP Morgan Asset Management (India) Pvt. Ltd.

Smoothening off the rounding effect

This also means that your liquid fund will take as little as risk as possible to ensure that volatility remains low. A four-digit NAV (with four decimals) ensures that the volatility gets smoothened out. Here’s how:

Say, a liquid fund ‘A’ with an NAV of 10.0000 goes up to 10.0030 in a day. This means your liquid fund gives a return of 0.03% in a day or 10.95% annualized (0.03% * 365 days). Now if another similar liquid scheme’s (scheme ‘B’) NAV goes up from 10.0000 to 10.0031 (in a day), this translates to a gain of 11.28%. Just by rounding off the fourth decimal upwards (0.0031 is greater than 0.0030), your returns differ by 33 basis points (100 basis points are equal to 1 percentage point).

Compare these two schemes when their face values are 1,000.0000. If scheme A’s NAV goes up to 1000.3000 or even to 1000.3001, your fund’s gains will remain at 10.95% in both the cases. The impact of rounding off diminishes even if your fifth decimal in the first case is, say “2" or “6" in the second case. In this case, scheme A’s NAV gets rounded off downwards ( 1000.3000) and scheme B’s NAV gets rounded off upwards ( 1000.3001). This is because we are dealing with a four-digit number (with four decimals).

“Sebi has made it clear that liquid funds should reduce their risk profiles. In the present scenario, it is good for liquid funds to increase their face values," says Vikrant Mehta, head (fixed income), AIG Global Asset Management Co. (India) Pvt. Ltd.

Watch Video

Many funds are changing their face value. So should investors be worried? Watch what Mint’s mutual funds editor, Kayezad Adajania, has to say.

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Further, such changes typically happen in shorter duration schemes such as liquid funds and ultra short-term funds. For long-term funds such as equity, balanced or even monthly income plans, it doesn’t matter whether their NAVs’ face values remain at 10 or 1,000.

What should you do?

Expect more and more liquid and ultra short-term funds to increase their face values this year. We suggest you ignore face value changes and stay invested as such moves benefit liquid fund unitholders.

Graphics by Paras Jain/ Mint

kayezad.a@livemint.com

Also See | Four-digit navs help make gains visible……while smoothening out volatility (PDF)

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