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Mutual Funds - Liquid funds offer instant redemption facility. Here's what you need to know
09-Jun-2020

Sundaram Mutual Fund launched an instant redemption facility under its liquid fund, Sundaram Money, earlier this week. Many other fund houses offer this facility already.

Under this facility, investors can withdraw up to 50,000 per day almost instantly on any given day throughout the year.

Normally, if you redeem your investments from a liquid fund, you get the proceeds in one or two days, depending on when you make the redemption request.

Liquid funds are often suggested as an alternative to a savings bank account for parking extra cash or emergency fund.

With banks cutting interest rates to historic lows, can investors rely on this facility as an alternative to savings bank account? Here is all you need to know about the facility, how to use it and how it compares with savings bank accounts.

Under this facility, which was initially launched for first-time retail investors, the money is transferred instantly to the investors’ bank account using the IMPS facility.

Nippon Mutual Fund was the first fund house to launch this facility in 2016. Many other fund houses, including Axis Mutual Fund, DSP Mutual Fund and PGIM India Mutual Fund, followed suit.

In 2017, capital markets regulator Securities and Exchange Board of India (Sebi) came out with regulations to standardize the features of this facility. Since the risk is higher in other schemes, Sebi took a conservative stance and restricted the facility to liquid funds.

According to Sebi guidelines, investors are allowed to withdraw up to 50,000 or 90% of the investment amount, whichever is lower, per day per scheme under this facility.

To make a withdrawal, you will need to put in a redemption request. In order to arrive at the number of units to be cancelled in line with the redemption request, you’ll need to check the applicability of the net asset value (NAV).

The applicability of NAV will depend on when the redemption request is placed. According to Sebi regulations, in case the redemption request is placed before the cutoff time, the same day’s or the previous day’s NAV, whichever is lower, will be applicable. In case the redemption request is placed after the cut off time, the same day’s or next day’s NAV, whichever is lower, will be applicable.

NAV will be calculated on the basis of the value of the underlying securities divided by the number of units on any given day.

Right now, interest rates offered by savings bank accounts are at multi-year lows and are expected to go down further. Punjab National Bank cut the interest rates on its savings bank account to 3% from 3.5% on 3 June, while State Bank of India of India, the biggest lender, cut its rates to a historic low of 2.7%, effective 31 May.

In comparison, the liquid funds category gave an average return of 5.41% over the past one year.

Should you go for it?

Liquid funds have been often suggested as an alternative to savings bank accounts to park extra cash. The instant redemption facility does help in providing better liquidity, but it can’t replace savings bank accounts.

Apart from this, investors should look at the post-tax returns and other costs. Remember, in case of liquid funds there will a very small exit load if withdrawal is made within the first seven days of the investment.

Also, in case of savings bank accounts, the interest earned up to 10,000 per year is tax-free, while in case of liquid funds, you will have to pay short-term or long-term capital gains tax depending on your investment tenure. If you have invested for less than three years, the short-term capital gains tax is applicable at your slab rate, while long-term capital gains tax is applicable after three years at a rate of 20% with indexation benefit. “You can use liquid funds to park that extra cash lying in a savings account which is likely to earn interest of more than 10,000," said Sadgopan.

Look at your financial needs before making a decision.

Source : Live Mint back