SEBI or Securities and Exchange Board of India has tightened norms on liquid funds to boost its risk management framework. On 20th Sept 2019, the SEBI has released a circular stating that, an exit load will be levied on the investors if they exit the liquid fund within 7 days of their investment. This norm will be effective from 20th Oct 2019. Further, the liquid funds must hold at least 20% of the net assets in the liquid assets. The liquid assets consist of- T-bills, government securities, cash and repo on government securities. This regulation by SEBI will be effective from 1st April 2020. So now the valuation of liquid fund securities will be based on mark-to-market basis.
Other Important Announcements by the SEBI
- Liquid and Overnight Funds are not allowed for pending deployment, parking money and in-short term deposits of the Scheduled Commercial Bank. Moreover, the liquid and overnight funds are barred from investing debt securities with structured obligations (SO ratings) or/and credit enhancements (CE ratings).
- The Liquid Funds need to hold at least 20% in liquid assets. This will help in ensuring the liquidity of the liquid funds and lowering the redemption pressure. In case, the liquid funds fail to follow the margin of 20% in the liquid asset, the AMC must ensure compliance before any allowing any future investments.
- The cut-off timings for NAV applicability subject to the units purchased in liquid and overnight funds shall be 1:30 pm. Previously, the cut-off time was 2 pm.
Consequences of exit load levied in Liquid Funds
- The returns from the liquid fund after the margin of investing a minimum 20% net assets in liquid assets will lower down the gross yields. Based on the market condition, the returns from liquid funds may reduce by 5 to 10 basis points.
- The risk concentration of the liquid fund gets reduced when the liquid funds are bound to keep at least 20% of its net assets in liquid assets. Moreover, sectoral exposure of the liquid funds to a single sector is limited to 20%. This will help in portfolio diversification.
- With the imposition of minimum 20% net asset allocation in the liquid assets reduces the overall yield of the fund. But the fund’s yield also depends on the fund manager’s investment style and the reading of the money market rates.
- The institutional investors who park their surplus money to the liquid funds for better returns might shift to overnight funds after the exit load imposition on redemption before 7 days of investment. Or else they will directly invest in TREPS or Tri-party Repo. So, the AUM volatility of liquid fund will get reduced.
- The fund managers can now take investment decision for the liquid funds freely after the exit load imposition. They do not have to face the daily redemption pressure while taking the investment call.
- The liquid funds will have an improved and less volatile liquidity profile. So, the liquid funds will be less affected by the market or systematic risk.