Liquid mutual funds are an excellent option to invest extra cash and receive a higher return than a savings account. In addition, they have a lower risk profile than other debt funds.
Some mutual funds have started offering quick redemption in their liquid plans in the last few years. This aims to improve their appeal to individual investors even further. This article delves deeper into the benefits and drawbacks of this facility and offers advice on whether you should go with it.
What are the facility's regulatory requirements, and how does it operate?
SEBI issued a circular (No. SEBI/HO/IMD/DF2/CIR/P/2017/39 dated May 8, 2017) providing mutual fund firms with clear guidance on how to offer this feature to investors. The following are the key points from the guidelines:
This facility will only be available to local investors
The financial transfer will only be done over the internet.
Only liquid mutual fund schemes may provide this service.
The maximum amount that an investor can redeem under this facility is INR 50,000/- or 90% of the scheme's most recent value, whichever is lower. This cap will be applied per day, per plan, and per investor.
This cap will be applied per day, per plan, and per investor.
The following is the Net Asset Value (NAV) applicable for redemption under this facility: applications received up to 3 p.m. – The lower of I the NAV of the previous calendar day and (ii) the NAV of the calendar day on which the application is received; applications received after 3.00 pm – The lower of I the NAV of the calendar day on which the application is received and (ii) the NAV of the following calendar day.
– The lower of I the NAV of the previous calendar day and (ii) the NAV of the calendar day on which the application is received; applications received after 3.00 pm – The lower of I the NAV of the calendar day on which the application is received and (ii) the NAV of the following calendar day.
The following is how the instant redemption service works:
The investor accesses the mutual fund company's website or mobile app.
She chooses "Instant Redemption" as a manner of redemption in the redemption request area.
She chooses "Instant Redemption" as a manner of redemption in the redemption request area.
The mutual fund firm employs Immediate Payment Service (IMPS) to deposit the redemption funds to the investor's registered bank account after the redemption request is approved. This usually happens in a matter of minutes or hours in certain circumstances.
This service is beneficial in three ways.
To begin with, this facility addresses the fundamental issue with liquid funds, which is that the redemption proceeds used to take several days to appear in the bank account. This is inconvenient if money is needed immediately, such as for a surgery or a child's school entrance deadline. If you intend to withdraw on weekends or holidays, the difficulty will be exacerbated.
Second, when an investor parks their excess funds in a savings bank account, she receives a pitiful return of roughly 4%. When compared to a bank account, investing in liquid mutual fund schemes yields a higher return.
Finally, storing big quantities of money in a bank account puts investors at risk of being hacked or falling victim to other internet frauds. Transferring a large sum of money to a liquid fund provides an extra degree of security from internet risks.
Is this a viable alternative to a bank account?
It's important to note that these methods don't take the place of having a legitimate bank account. A bank account is essentially a location where you keep your money and utilise it to pay bills. While you can put money in these liquid programmes, you won't be able to use them to pay for your bills. For example, you can't use your liquid fund to pay your power payment on a regular basis. In addition, the mutual fund firm has the power to refuse immediate redemption in certain circumstances.
As previously stated, money in a liquid plan is not as safe or accessible as money in a bank account. As a result, it does not take the place of having a real bank account. Assume you're looking to achieve financial goals by investing in liquid schemes. In such situation, immediate redemption may serve as a persuasion to spend the money on anything else. Your initial goal should be to manage your money so that you have enough money in your bank account to cover any impending short-term needs. You can use liquid schemes as part of the debt component of your portfolio to achieve your financial objectives. You should not, in this circumstance, require access to that money. Now we'll look at money that hasn't been set away for a specific financial goal or for an emergency. That money can be parked in a liquid plan that provides this service. In an emergency case where you want rapid access to funds, this feature can be quite beneficial.
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