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CHEQUE-writing money market funds may usher in a significant change in the mutual fund industry in India. These funds will attract a greater number of investors to the mutual fund fold. The players can sell their other products to the new customers, allowing the industry to grow.

Money market mutual funds score over savings bank accounts by generating returns of at least one percentage point more per annum. The difference in returns, which used to be in excess of 2 percentage points, has now narrowed to one because of the fall in interest rates.

However, while investors can issue cheques to anybody from savings bank accounts, the RBI rules allow an investor to issue cheques only to himself from a money market mutual fund. So, this places a restriction on the amount an investor would be willing to transfer from savings accounts to mutual funds.

AMFI is now asking the RBI to allow a limited cheque-writing facility for money market funds. AMFI says restriction can be placed on the number of cheques written and the amount.

If the rules are relaxed, higher flows and more converts are a distinct possibility. Along with the facility of investing in and divesting from mutual funds through ATMs, the rules will make investing in mutual funds quite flexible. This will eventually allow greater penetration of mutual fund products among investors who are still hooked to term deposits of banks.

However, it will be surprising if the RBI moves fast in allowing money market mutual funds to offer cheque-writing facility. This move has implications for the banking system, which is only now slowly being nursed back to health.

Banks' largest source of low-cost deposits is savings bank accounts. So, the RBI may be unwilling to unleash competition in the market for savings bank deposits.

Still, if the rules are relaxed to allow limited cheque-writing facilities from money market mutual funds, that could increase the attractiveness of the product. Investors seeking more value from their short-term funds will be enthused.

Suresh Krishnamurthy

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