In a move that could hit the flow of money into liquid schemes of mutual funds, the Securities and Exchange Board of India (Sebi) has asked AMCs to ensure that investors have credited the entire amount of subscription as per the application in the bank account of the respective liquid schemes. This is to check on investing on borrowed money.
Earlier, mutual funds would offer units without receiving the entire funds in the scheme account , expecting the money to come later during the day. The new ruling is likely to impact the flow of money into liquid schemes of mutual funds. “The move is positive in a sense that it would mitigate systematic risk involved in the earlier practice,” says Mahendra Jajoo, head, fixed income, Pramerica Mutual Fund.
Earlier, several fund houses were seen investing in debt papers by resorting to short-term borrowing even before the fund got credited into the account. This would reflect in the asset-liability mismatch. Says K Ramanathan, head, fixed income, ING Mutual Fund, “With the new ruling, we would have more bank accounts with direct credit facility which will ensure fund transfers do not take time.” In a way, this move will make systems more effective and reduce operational risks.
Further, Sebi has also increased the cut-off timing for applicability of the net asset value (NAV) to 2 PM from the exiting 12 noon. So, if the application is received by 2 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. Sebi has mad it mandatory for fund houses to list interval schemes, given that exit options are limited for such investors. The earliest deadline for the new guideline is April 1, 2011.