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Check This Cheque Out

A third-party cheque writing facility can revolutionalise the mutual fund industry, especially the liquid and money market funds. However that can happen only if AMFI's suggestion of allowing these funds to issue chequebooks is implemented.

Mutual funds are present in a myriad of shapes, sizes and needs. If it's long-term growth of capital, then equity funds are the name of the game. If you desire a high degree of liquidity and capital preservation, then liquid and money market funds are the instruments of choice. Well not quite!

While liquid and money market funds offer high liquidity, this does not translate into the convenience, which a bank saving deposit offers. If you have to pay your grocer in all probability you would take out your chequebook rather than look at your money market mutual fund deposit. But if AMFI (Association of Mutual Funds in India) has its way, that could soon change. Recently, the industry body has once again approached the Reserve Bank of India (RBI) for permitting liquid and money market mutual funds to issue chequebooks to investors that can be used just like bank chequebooks to directly pay anyone.

However, there are some issues, which need to be resolved before this move can take off. The biggest stumbling block may be legal requirements, which permits only banks to issue instruments like cheques. Furthermore, banks are a part of the clearing system which mutual funds would have to join. Also, if funds offer such facilities then they have the potential of taking away a large chunk of the low cost deposits that banks hold with them in the form of savings accounts.

Even a half per cent higher return from these funds as compared to savings deposits would attract investors. This is to say nothing of the seven per cent that these funds have generated in the extremely bullish debt market of this year.

It may be because of these factors that the RBI has been going slow on this proposal, which has been dangling with it for the past year or so. In order to overcome these hurdles, AMFI has even suggested that the RBI might impose limitations on the number of cheques, which might be issued, or the maximum amount, which could be issued through these cheques.

Currently, liquid funds do offer a cheque writing facility. But this is just an improved redemption slip where an investor can write a cheque only to him/herself. The development of a third party cheque writing facility has been one of the most important factors behind the rapid growth of money market funds in the US. If and when this move is approved here, it has the potential of revolutionizing the mutual fund industry.