In another move that may badly hit the flow of money into liquid schemes of mutual funds, the Securities and Exchange Board of India (SEBI) has asked fund houses to ensure availability of the entire amount of subscription as per the application in the bank account of the respective liquid schemes.
The regulator has said that the funds should be available for utilisation before the cut-off time without availing any credit facility, whether intra-day or otherwise, by the respective liquid schemes.
Earlier, mutual funds would offer units without receiving the entire funds in the scheme account on the expectation that the money would come later during the day.
The new ruling is likely to negatively affect the flow of money into liquid schemes of mutual funds. A fixed income head of a large fund house on the condition of anonymity said that the ruling would have a substantial impact on the industry as a lot of float money used to come into liquid funds, but with the new norm the whole dynamics would change.
Chief investment officer of another fund house also said that it would be very tough and challenging task to make available the entire money in the account before the cut-off time as the banking system is India itself is not very effective.
Mahendra Jajoo, head of fixed income, Pramerica Mutual Fund, also said the move would restrict the flow of money into liquid funds. He was quick to add that the norm would eliminate the systematic risk involved in the earlier practice. However, K Ramanathan, head of fixed income, ING Mutual Fund, said the impact of the ruling would not be that large. “Many a time the fund transfer takes time because we do not have direct credit facility with many banks. Now that the new ruling has come, we would have more bank accounts with direct credit facility, so as to ensure that fund transfers do not take time. In a way, it will help us make our system more effective while reducing any operational risk involved,” Ramanathan said.
Liquid funds are ultra short-term debt funds, which mainly invest in money market papers. Large institutions and corporate houses invest their surplus cash in these funds as they offer not only better returns than short-tenure bank deposits, but also liquidity as there are no restrictions on redemptions from such schemes.
In a circular issued today, SEBI also increased the cut-off timing for applicability of the net asset value (NAV) to 2 pm from the exiting 12.00 noon.
If the application is received up to 2.00 pm on a day and funds are available for utilization before the cut-off time without availing any credit facility, whether, intra-day or otherwise, the NAV of purchase would be that of the day immediately preceding the day of receipt of application, or else the price of the units would the closing NAV of the day of the application.
The SEBI has also asked fund houses to make the interval funds close-ended by not allowing any redemption even by paying exit loads on any days other than the specific period mentioned in the scheme information documents of the scheme.
The regulator has also asked the units of interval funds to be mandatorily listed. The specified transaction period should be of minimum 2 working days and minimum duration of an interval period in an interval scheme/plan should be 15 days, says the SEBI circular.
Jajoo said that the ruling on interval funds was expected as interval funds are in reality FMPs (fixed maturity plans) and they should also follow the norms meant for FMPs.
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