The ability to instantly liquidate financial assets can mean a lot for a retail investor during uncertain times such as the present one, when he may have to meet sudden and unforeseen expenses. While the money parked in banks’ savings and current accounts can be accessed instantly, one needs to wait for anything from a day to five days to liquidate investment products such as stocks, mutual funds, gold and bonds.

But liquid funds can give you redemption money up to ₹50,000 in a matter of minutes. You can get this benefit throughout the year including weekends and national holidays. This has made liquid funds a preferred avenue for many to park their emergency corpus.

What is it?

Pursuant to the SEBI circular dated May 8, 2017, mutual fund companies have an option to introduce the Instant Redemption Facility (also called Instant Access Facility) under the growth option of liquid funds. Fund houses will credit the redemption proceeds in the registered bank account of the investor offering Immediate Payment Service (IMPS) on the same day the redemption request is received.

Currently, this instant redemption facility is offered only in liquid funds and not in overnight funds or other mutual fund categories.

Almost all the asset management companies (AMCs) offer this facility in their liquid funds. Only retail and HNI investors can opt for this instant redemption facility for a maximum of ₹50,000, or 90 per cent of the folio’s value, whichever is lower. For instance, if the current value of the units of liquid funds held in your folio account is ₹40,000, then you are allowed to redeem up to ₹36,000 (90 per cent of ₹40,000) through this facility. This limit is applicable per day per investor per scheme on the basis of the first holder’s PAN (permanent account number).

If you want to redeem more than the above limit in liquid funds, you have to opt for the normal redemption process wherein the proceeds are credited in your account, usually in a working day.

Applicable NAV

Under normal circumstances, the cut-off time for redemption in liquid funds is 3 pm. If the AMC receives your redemption application before 3 pm, you will get the redemption money based on the NAV of ‘the day you applied’ or ‘the previous day’, whichever is lower. If the AMC receives your redemption application after 3 pm, the lower of the two — ‘NAV of the day you applied’ and ‘the NAV of next day’ — will be considered.

However, due to the lockdown, SEBI has temporarily (April 7 to April 30) advanced the cut-off time for redemptions in liquid funds to 1 pm.

The NAVs for liquid funds are declared by AMCs throughout the year including national holidays. So, investors can avail the instant redemption facility on any day.

How to place a redemption order

Thanks to the advent of technology, an instant redemption request can be made through the AMCs’ websites and mobile apps. Mutual fund aggregator MF Utilities offers this facility for a couple of fund houses including Nippon India Mutual fund through its website.

Investors are now also allowed to place instant redemptions orders through the websites and mobile apps of the brokers and distributors who have partnered with the AMCs. Additionally, they can consider the physical route, submitting the application in AMC offices and service centres.

Keep in mind that liquid funds charge an exit load if the redemption is made within seven days from the date of investment.

Good avenue to park emergency funds

Liquid funds provide a good avenue to park your emergency funds, considering their instant redemption facility. You can consider the lump-sum as well as systematic investment plan (SIP) route to invest in these funds.

Liquid funds invest in debt and money market securities with a residual maturity of up to 91 days. They invest mainly in tri-party repo (TREPS), certificate of deposits (CDs), treasury bills (T-bills) and commercial papers (CPs). Recently, SEBI mandated liquid funds to follow the mark-to-market method of valuation while computing NAVs. This may increase the volatility marginally in their returns, going ahead. The interest rate risk and credit risk in liquid funds are slightly higher than in overnight funds.

One can expect liquid funds to deliver similar or slightly higher returns than bank FDs. Normally, they generate returns of 50-150 bps (basis points) higher than the RBI’s repo rate, which is currently at 4.4 per cent.

Liquid funds too are influenced by macroeconomic events and quality issues. It is important to choose funds with relatively lower credit risk, portfolio diversification and inherent high liquidity. A few liquid funds picked based on the above criteria are ICICI Pru Liquid, L&T Liquid, DSP Liquidity, Mirae Asset Cash Management and Kotak Liquid Fund.

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