Beware of Mutual Funds That Offer Instant Redemption!

Published: January 11, 2017 at 10:32 am

Last Updated on September 27, 2023 at 3:53 pm

In the recent past, three mutual funds houses (Reliance, DSP Black Rock and SBI) have launched a facility in which it buys back units from its investors and instantly credits the equivalent value into a registered bank account. At first sight, this seems like a wonderful idea. However, on closer inspection, we begin to understand why SEBI has reportedly “expressed concern” about this move.

Thanks to Anish Mohan’s research (see below), none of the schemes that offer instant redemption are liquid funds. They are, what is informally known as ultra-short term funds. Informally because, with the exception of liquid funds (that can only invest in bonds maturing on or before 91 days), there are no rules with regard to where other debt fund schemes can(not) invest. So we should not be surprised if a “banking and PSU” debt fund holds about 20% of GOI bonds with the hopes of riding the interest rate fall.

Instant redemption from a liquid fund makes a lot of sense as it meant for parking money. Then it is as good as a saving bank account. But why an ultra short-term fund? Why would we need instant redemption from an investment vehicle? With such funds not having a clear investment mandate, the instant redemption facility can result in unnecessary redemption pressures in the event of an abrupt interest rate increase, a credit rating downgrade or a market-wide crisis. Everyone agrees that equities are risky, but not many investors understand the risks associated with debt funds. Offering instant redemptions from schemes where such risks can be significant is asking for trouble.

SEBI is being reactive by expressing concern. It can do even better by being pro-active and offer clear investment style guidelines for both debt and equity funds. This will help investors categorise risk and invest accordingly. Until then, I will stay away from any scheme that offers instant redemption.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Now over to Anish.


The following funds provide instant redemption facility to investors

  1. DSP BlackRock Money Manager
  2. Reliance Money Manager Fund
  3. SBI Savings Fund

Now if I would delve into the Scheme Information Document (SID) of the above funds, the following are my observations. I would pick up key elements from the SID

The SID of DSP BlackRock Money Manager says  “The weighted average maturity of the Scheme will be less than or equal to 6 months” which makes it an Ultra Short Term fund.

Now notice how Reliance Money Manager has positioned its asset allocation in the SID. Up to a maximum of 100% can be invested in Debt Instruments including Government Securities, Corporate Debt, Other debt instruments and Money Market Instruments with average maturity less than equal to 12 months whereas Debt Instruments with average maturity greater than 12 months can be present to the maximum extent of 50%.

I would be circumspect on such a wide variance of average maturity and given a chance where the Debt instruments greater than 12 months’ duration and less than 12 months’ duration comes to a 50:50 ratios, the average maturity can easily be higher than 1 year. That surely will not qualify it to be an Ultra Short Term at that instant.

Coming to the new kid round the block, SBI Savings Fund comes with a piquant situation. The SID does not even obscurely put any restriction on the mandate of average maturity and neither they can be assessed objectively. It mentions that Fixed/Floating rate Money market instruments will include Commercial Paper, Commercial Bills, Certificates of Deposit, Treasury Bills, Bills Rediscounting, Repos, Government securities having an unexpired maturity of less than 1 year.

At the same time, the SID goes ahead to confuse investors by mentioning “Investment in Corporate Bonds and Debentures in the Scheme will be in securities with maturities not exceeding 3 years”. It even goes on to quote “This Scheme will be ideal for investors with a short-term investment horizon of not more than 1 year”. Well, leave that piece of advice for the reader of the SID to derive or conclude and simply abdicate such advice to the caveat lector clause. At the end of day, I don’t read SID to derive investment advice.

The discussion on the above 3 clearly indicates that the 3 funds are to fall under Ultra Short Term category with DSP Blackrock having 100% certainty that it will always remain an UST, as long as the SID stays sacrosanct. At the same time, this has driven home the point, that, in no way, mutual fund providing the facility instant redemptions are liquid funds by even any stretch of imagination. There are no Liquid funds as on today, who provide instant redemptions and demonstrate to be truly liquid.

My personal take on this instant redemption is a mixed bag. There is a lot of myth that Liquid funds or even Ultra Short Term funds are a panacea to easy liquidity in Mutual Funds and is no less an alternative to Savings Bank Account, if not better. Data manipulators will simply do a lot of number crunching to demonstrate that the category average return for Ultra-Short Term funds for the past 1 year is 8.65% whereas for liquid is 7.51%. And when compared to banks, simply do not stand any comparison with zero interest on current accounts and 4% on savings account. I find this rationale preposterous. My savings account is for a different purpose compared to my mutual fund investments and no one can replace the other. So UST replacing bank account is ruled out.

However, instant redemption is a psychological feel of how liquid is my investment and I hate to wait for 2 business days for my funds to get credited in. So, instant redemptions give that comfort feel, and it is purely a psychological feel rather than a pivotal factor for investing in UST or Liquid fund. I would like to invest in a genuinely-liquid Liquid fund and would find resonance in the theme of instant redemption tagged to Liquid funds. Till that time, it’s just a nice-to-have and makes no difference.


Not much difference to the investor (other than the illusion of getting money back instantly), but big difference to the AMCs who can use this “psychological comfort” for gain.

I hope sanity prevails and SEBI bans instant redemptions from non-liquid funds and btw does not allow investments from wallets.

You Can Be Rich Too


My new book with PV Subramanyam, published by CNBC TV 18

The book comes with 9 online calculator modules to create your own financial plan.

It also has detailed selection guides for equity and debt mutual funds.
Amazon Rs. 307 (now 23% OFF)
Kindle Rs 244.30

Infibeam Rs 307

Googe Play Books App Store (Rs 244.30)

What Readers Say

  • Simply superb….A must read book to all. A must book need to be introduced at final year engineering/graduate course.
  • Simple and powerful This book empowers the reader with the concepts in easy to understand & simple form. Those who have been reading blogs of both authors would know that they are not only good with finance domain but also have a knack of simplifying the methods of investing for their readers. This book by them is a gem of financial knowledge for people who are starting to invest or want to get better at it. The presentation and the thought process with calculators is extremely powerful.The book should be read & calculators used simultaneously to understand the concepts well. The calculators when used with real inputs will show you where you are & where you need to reach for each of your goals. Don’t ignore these numbers.Learnings from Chapters 7 to 11 will help you avoid going off path & saving your money from financially hazardous products. With discipline & right approach suggested here you wouldn’t need a financial advisor to build wealth.
  • This is perfect book on personal finance. Very nicely explained about taxation about debt mutual fund. Topics like early investing and asset allocation are very well explained. – Mahesh Deshmukh
  • Highly Recommended For anyone who wishes to take control of his/her finance this book is a must read. Very simply put, even an amateur in finance will be able to understand and implement. The author genuinely attempts to inculcate the habit of investing among the people who have the ability to invest but refrain from doing it, either due to lack of time , interest or understanding!. The message from the book is ” Investment done without setting a goal/ objective is like leaving for a trip without knowing the destination, not everytime the end result will be promising. Hence, it’s important to invest in a planned & disciplined manner.” A read is highly recommended ??
  • A must book for everyone who wants to take control of personal finance. Nice explanation of how a debt mutual fund works. Bonds trading and indexation benefits in high inflation years were something new I learnt. After reading this book you will be able to easily choose any funds, because you will know what that fund does or how that fund works  
Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)