Sebi working on norms for instant redemption of liquid mutual funds
Instant redemption of liquid mutual funds into bank accounts will boost inflows and attract retail customers to such funds
Mumbai: Come April and you may receive an instant credit to your bank account on redeeming a liquid mutual fund, just like a mobile wallet transaction.
The Securities and Exchange Board of India (Sebi) is in the process of framing a set of rules for such transactions, three people with direct knowledge of the matter said on condition of anonymity.
If instant redemption of liquid mutual funds is allowed, it will boost inflows and attract retail customers to such funds. There is some Rs2.78 trillion managed under liquid funds currently, and retail customers account for about 3%.
Currently, the money from redeeming a mutual fund gets credited to a customer’s account only the next working day or two days after the request if it is not done through the immediate payment service (IMPS), placing liquid funds at a disadvantage to bank fixed deposits.
To be sure, Reliance Capital Asset Management Ltd and DSP BlackRock Mutual Fund recently started offering instant redemption to retail customers in liquid and money market schemes subject to a cap of 95% of total balance and a maximum of Rs2 lakh a day.
“Sebi wants to standardize the instant redemption facility so that retail investors feel more comfortable in buying liquid funds,” said one of the three people cited earlier. “The timing too is appropriate because the rates offered by bank fixed deposits are lower than those offered by liquid funds.”
Sebi’s mutual fund advisory committee discussed this with the Association of Mutual Funds in India (Amfi), an industry lobby, about 10 days ago, said the second person, who is a part of the advisory panel. Sebi is likely to finalize these rules by the end of this fiscal year, these people said.
A Sebi spokesperson didn’t respond to an email seeking comment.
“This is a practical and appropriate move,” said Dhirendra Kumar, chief executive of mutual fund analytics firm Value Research. “Since liquid funds do not carry any load (fees paid by the investors) and the exact return is known to the customer right at the time of investing money, this facility has a lot of potential to attract retail inflows.”
Sebi may propose a cap on such transactions in order to avoid any systemic risk in the event of abrupt bulk redemptions. Under the proposed norms, customers will be allowed to receive 70-80% of their redemption amount the same day, said the second person. “This will ensure that in the event of any adverse situation or any negative news flow the net asset value of the scheme does not undergo any steep erosion in a single shot. RBI has to recommend the guidelines in relation to all this,” this person said.
In liquid funds, the returns are fairly predictable and after Sebi’s tightening of portfolio norms for such funds in 2008, risks were curbed significantly. However, during July and August 2013, liquid funds suffered severe damage after RBI tightened liquidity to protect the rupee. Bond yields shot up and prices dropped, hitting net asset values and prompting investors to redeem around Rs45,000 crore in two or three days.
Kumar says the chances of systemic risks arising in liquid funds is very low. “One crisis happened in 2013 and it was handled in two sessions. Chances of such occurrences are low and Sebi need not worry much,” Kumar added.
The instant redemption facility for liquid funds will be a test case for Sebi. “Going forward, asset management companies (AMCs) may offer similar facilities to the retail investors in even other categories of schemes,” said the first person.
There are 44 AMCs in the country with total assets under management of about Rs16.28 trillion as of October-end.
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