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.
Now over to Anish.
The following funds provide instant redemption facility to investors
- DSP BlackRock Money Manager
- Reliance Money Manager Fund
- 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.
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