Liquid mutual funds are a great way to park surplus money and earn a better return than a savings bank account. Also, they come with relatively less risk within the spectrum of debt funds. Over the past few years, some mutual funds have started offering instant redemption facility in their liquid schemes. This is to further increase their attractiveness among retail investors. This article explores the pros and cons of this facility in more detail and provides you with an insight on whether you should go ahead with this facility.

What are the regulatory guidelines for this facility, and how does it work?

SEBI released a Circular (No. SEBI/HO/IMD/DF2/CIR/P/2017/39 dated May 8, 2017), giving clear guidelines to mutual fund companies on offering this facility to investors. The essential points from the guidelines are as follows:

  • This facility will only be offered to resident investors (NRI or foreign citizens cannot avail of this facility).
  • The fund transfer shall be done through online mode only.
  • This facility can only be offered in liquid mutual fund schemes.
  • The limit that an investor can redeem under this facility shall be INR 50,000/- or 90% of the latest value of the investment in the scheme, whichever is lower. This limit shall be applicable per day per scheme per investor.
  • Net Asset Value (NAV) applicable for redemption under this facility are as follows:
    • application received up to 3.00 pm – Lower of (i) NAV of previous calendar day and (ii) NAV of the calendar day on which application is received;
    • application received after 3.00 pm – Lower of (i) NAV of calendar day on which such application is received, and (ii) NAV of the next calendar day.

The process for instant redemption facility works as follows:

  • The investor logs in to the website or mobile app of the mutual fund company.
  • In the redemption request section, she selects “Instant Redemption” as a mode of redemption.
  • Once the redemption request is successful, the mutual fund company uses Immediate Payment Service (IMPS) to credit the redemption proceeds to the investor’s registered bank account. This generally happens within a few minutes or in a few hours in some cases.

How does the instant redemption facility useful?

This facility is helpful mainly in three ways.

Firstly, this facility helps resolve the main problem with liquid funds that the redemption proceeds used to take some days to get credited in the bank account. This proves an inconvenience if money is required urgently, for example, for any surgery or the last date of child’s school admission. The problem is increased if you plan to withdraw on weekends or public holidays.

Secondly, the investor gets a measly return of around 4% when she parks their surplus money in a savings bank account. Parking money in liquid schemes of mutual funds gives a better return as compared to a bank account.

Thirdly, keeping large sums of money in bank account exposes investors to the threat of hacking and other online scams. Transferring a big chunk of money to a liquid fund adds an additional layer of protection to your money against these online threats.

#Are these schemes an alternative to a bank account?

It is essential to clarify that these schemes do not replace the need for a proper bank account. A bank account is basically a place where you park money and use it to pay off your expenses. While you can park money in these liquid schemes, there is no facility to directly pay for your expenses from the scheme. For example, you cannot have any standing instructions from your liquid fund to pay your electricity bill. Further, the mutual fund company has the right to reject instant redemption in certain specific situations. For example, if we check the Scheme Information Document of SBI Liquid Fund, it reads as follows:
“Following are the scenarios under which redemption received through this facility would be processed as normal redemption as per applicable SEBI guidelines

  1. Redemption Requests (under the facility) higher than cash set aside in the scheme based on past track record of such requests.
  2. Settlement/clearing issues at RBI/clearing bank.
  3. Scheme is facing extreme liquidity issues.
  4. Unpredictable operational problems and technical failures (e.g., a black out), occurred in spite of appropriate diligence.
  5. In the event AMC imposes restriction on normal redemptions due to any of the reasons specified in scheme information document and statement of additional information and as per process approved by SEBI.

The above scenarios are indicative only and the AMC reserves the right to add / modify/ to process the redemption as normal instead of IAF in any other circumstances beyond the control of AMC / Mutual Fund.”

Our view: Should you opt for this facility?

As we understood above, money in a liquid scheme is not as risk-free and accessible as in a bank account. Hence, it does not replace the need for a proper bank account. Suppose you are investing in liquid schemes for your financial goals. In that case, instant redemption can act as a temptation to use that money for discretionary purposes. Your first aim should be to manage your money so that the money for upcoming short-term requirements is available in the bank account itself. For your financial goals, you can consider liquid schemes as part of the debt component of the portfolio. In such a case, you should not ideally need to access that money. Now we come to money that is not earmarked for any financial goal or set aside for emergency purposes. It is that money that you can park in a liquid scheme that offers this facility. This facility can prove immensely helpful in an emergency situation where you need immediate access to money.
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