Instant redemption facility gives some liquid funds the edge

Many liquid funds have introduced a feature that allows for instant redemption of proceeds. Fund houses such as Aditya Birla Sun Life, Axis, ICICI Prudential, Nippon India, and PGIM have been offering this facility.  Sundaram AMC has recently started offering this facility for the Sundaram Money Fund.

Liquid funds help you to earn some returns on the money that you can invest for a very short term, typically 7-15 days. Financial advisors suggest that you park your emergency corpus (unavoidable six months’ expenses) in a liquid fund. This is one of the least risky mutual fund categories. From June 30, all underlying securities of liquid funds will be marked to market. Therefore, fund houses have lowered their underlying maturities to make them as less volatile as possible. Liquid funds have a running average maturity of between 40 and 50 days. This may be reduced to around 30-35 days in the future.

Why is insta-redemption facility useful?

Although liquid funds are avenues meant to deploy sums for a few days or weeks, it still takes a day for the money to land in your bank account when you make a withdrawal request.

“One disadvantage that liquid funds carry is the time lag of a few days between putting in a redemption request with the mutual fund and getting the money in your bank account. The ‘Instant Redemption Facility’ addresses this very issue,” says Sunil Subramaniam, Managing Director, Sundaram Mutual Fund. Your redemption lands in your bank account within minutes. “Instant redemption facility makes your investments in liquid funds accessible during weekends and holidays too. This ensures peace of mind if you have parked your emergency corpus in liquid funds,” says Pankaj Mathpal, founder and managing director of Optima Money Managers.

Are there extra charges for using the facility?

Though there are no additional charges, there are certain conditions. Only the growth plan of liquid schemes offer instant redemption.

You can redeem up to Rs 50,000 or 90 per cent of the portfolio value in liquid funds across folios under a permanent account number (PAN) per day.  For example, if you have Rs 1 lakh in a liquid fund offering instant redemption facility, then you can withdraw Rs 50000 on a given day, as the amount satisfies both the conditions – maximum limit of Rs 50000 and it is below 90 per cent of the investment amount. But if you have a balance of Rs 50000 in your liquid fund, then you can withdraw a maximum Rs 45000.

You can opt for instant redemption facility on your fund house’s website or app. Make sure you chose ‘instant redemption option.’ Otherwise, you will get your money after a day. Instant redemption is not available offline.

Fund houses have tied up with some distributors to offer this facility online. For example, Kuvera – an online transaction platform – also offers SaveSmart, a bouquet offering of four liquid fund schemes with instant redemption facilities. Moneyfront, another online transaction platform offering direct mutual fund schemes, has tied up with ICICI Prudential AMC to offer instant redemption facility in ICICI Prudential Liquid Fund.

Moneycontrol’s take

Increased liquidity in the financial markets and falling interest rates have reduced the returns delivered by liquid funds. The imposition of stamp duty can further dent returns on your liquid funds if you redeem within a handful of days. This may make some of the savings bank accounts offering high interest rates as more attractive options for you. However, if you fall in the higher income tax brackets, you may want to continue with liquid funds. Mathpal reminds us that instant redemption facility cannot be the sole determinant of scheme selection. The quality of the fund’s management and the underlying portfolio will always remain paramount to scheme selection. However, all things remaining equal, instant redemption gives added comfort.