Instant redemption facility extended to liquid funds: Are liquid funds an alternative to savings accounts?

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Recently, Sundaram Mutual Fund introduced an instant redemption facility under its liquid funds. This facility enables investors to withdraw up to Rs 50,000 instantly on any given day throughout the year. Usually, on redeeming investments from a liquid fund, you get the proceeds in one or two days, depending on when the redemption request is made.

As the name suggests, liquid funds are high liquidity open-ended schemes that are invested in debt funds and money markets instruments such as government securities, treasury bills, and call money, and so on. The credit associated with such funds is relatively low and offers a maturity period of 91 days. The liquidity aspect is the most striking feature for investors in such funds as the redemption payouts are credited to the bank account on the next working day.

Liquid funds are now recommended as an alternative to a savings account and serve as an emergency fund in the backdrop of the ongoing uncertainties and dip in interest rates. Liquid funds are rated above savings account as it provides pre-tax returns which are linked to underlying securities in the portfolio as compared to 3.5%- 4 % given by savings bank account. However, in a savings bank account, investments of up to Rs. 1 lakh are covered under deposit insurance but no such attribute is available with Liquid Funds.

Instant redemption facility

This provision of instant redemption was initially launched for first-time retail investors. In this case, the money is transferred instantly to the investors’ bank account using the Immediate Payment Services (IMPS) facility. And it was Nippon Mutual Fund, the first to launch this facility in 2016, followed by other fund houses including Axis Mutual Fund, DSP Mutual Fund, IDFC Mutual funds and PGIM India Mutual Fund.

In 2017, capital markets regulator Securities and Exchange Board of India (SEBI) introduced guidelines such as investors are allowed to withdraw up to ₹50,000 or 90% of the investment amount, whichever is lower.

Steps to avail for this facility

  1. To initiate a withdrawal, you will need to put in a redemption request. 
  2. Check the applicability of the net asset value (NAV), which is dependent on when the redemption request is placed.

As per the SEBI guidelines, if 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, and if the redemption request is being placed after the cut off time, the same day’s or next day’s NAV, whichever is lower, will be applicable. (NAV is calculated based on the value of the underlying securities divided by the number of units on any given day.)

Is it an alternative? 

Liquid funds are increasingly recommended as an alternative to savings bank accounts for investing idle funds. The instant redemption facility does help in providing better liquidity, but it can’t counterbalance savings bank accounts. The savings bank accounts offer a fixed and guaranteed interest rate, while nothing is guaranteed in case of liquid funds, though they are safer than other debt fund options. 

Liquid funds are good for short-term goals, holding emergency funds, and to ensure your money is being saved regularly. Afterall financial needs are different for each individual, consider the pros and cons as per your needs before making any investment decision.

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