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Instant Redemption in Liquid Funds and MF invesments through e-wallets

SEBI, in a press release on April 26, 2017, issued guidelines for instant redemption from liquid funds and investment in mutual funds from digital wallets such as Paytm.

Let’s look at what such guidelines mean for you.

Instant redemption in Liquid Funds

By instant redemption, I mean that the money will be available in your account in a seconds after you press Redeem button for your investments..

  1. Investors can redeem up to Rs 50,000 instantly only from liquid funds. Currently, it takes 1 business day for the redemption proceeds of a liquid fund to reach from account.
  2. The instant redemption limit has been set at Rs 50,000 or 90% of your investment in liquid fund, whichever is lower. Therefore, if you have invested Rs 40,000, instant redemption will be limited to only Rs 36,000.
  3. The instant redemption facility in liquid funds is available only to Non-residents can’t access this facility.
  4. The applicable NAV will be lower of Previous day or prospective NAV. Not a big concern.

A small technical point: Fund houses cannot borrow to meet such redemptions. As I understand, they will have to keep cash. This may compromise returns a bit in liquid funds.

How to avail Instant Redemption facility in Liquid Funds?

Now that the regulatory go-ahead is in place, you can expect the AMCs to follow suit and allow instant redemption in their liquid fund schemes.

The instant redemption facility will be surely be available through own AMC apps and websites.

MF Utility, an aggregator platform, is already providing instant redemption facility in Reliance Money Manager. Therefore, I believe such facility will be extended to other liquid funds that offer instant redemption.

You can follow other aggregator portals to follow MF Utility in providing instant redemption facility.

This facility may also be available through CAMS/Karvy websites or offices.

Such facility may not be available through you local distributor if you submit paper forms.

What about existing funds offering instant redemption?

A few Ultra short term debt funds such as Reliance Money Manager and DSP BlackRock Money Manager fund had been offering instant redemption for quite some time.

SEBI has limited instant redemption facility to only liquid funds. Therefore, such UST funds may have to stop instant redemptions or change the nature of the fund scheme to liquid.

As I understand, Reliance AMC is already planning to change the nature of Money Manager scheme to liquid. This will allow them to continue with instant redemptions. Earlier, the fund scheme allowed redemptions up to Rs 2 lacs per day. The limit will also go down to Rs 50,000 per day.

Investment through e-wallets

  1. Only the money loaded through net banking, cash or debit card can be used for purchase of mutual funds.
  2. Balance loaded through credit cards, cash back or any promotional scheme CAN NOT be used for purchase of mutual fund units.
  3. The limit of on investment is Rs 50,000 per year per Mutual fund scheme. You can always invest in different schemes. Will not be convenient management though.
  4. At the time of redemption, the sales proceeds will come to your bank account (and not to the digital wallet).
  5. Digital wallet companies CAN NOT offer any incentives such as cashback for investment in mutual funds.
  6. As I understand, investment will be in Regular plan (and not direct plan) of MF schemes.

You still need to do KYC before you invest.

However, with the cap of Rs 50,000 per financial year, it sits well with limit for Aadhaar-based KYC. If you have done Aadhaar based KYC (and not full fledged KYC), you can invest Rs 50,000 per fund scheme per year.

If a digital wallet manages to launch a successful MF platform, they are looking at some serious income through commissions.

What do I think of such moves?

Think these are steps in the right direction.

Allowing MF investments through digital wallets (along with Aadhaar based KYC) may increase penetration of the mutual funds. We will have to wait to see if that really happens.

By limiting instant redemption to Rs 50,000 per day only in liquid schemes, SEBI has provided laid down a mechanism for such facility. Clearly brings down the risk instant redemption facility comes with.

Many of us may start using liquid funds as a replacement for balance in savings accounts, which is good.

However, don’t ignore the risk.  Liquid fund investments may not be as safe as balance in savings account or bank FDs.  You need to manage the risk.

Additional Read

SEBI Press Release

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