SEBI plans to make liquid mutual funds safer

Sebi is planning to introduce tougher rules to protect investors in liquid funds, the most basic offering in the mutual fund basket, from credit risk.  Return over safety Liquid funds allow investors to park money for a short period, while assuring easy liquidity and high safety. Investors can redeem their money on the next business day (T+1 basis) .

Several liquid funds also offer instant redemption of up to Rs 50,000 a day. The safety aspect arises from the positioning of liquid funds in very short tenure bonds, which are not affected by broader bond market fluctuations. These funds can only invest in instruments bearing maturity of up to 91 days. This ensures that fund managers do not carry unnecessary interest rate risks.

The funds sit at the near bottom of the risk graph for bond funds—overnight funds are a notch safer— offering investors returns similar to a bank fixed deposit. While liquid funds are mostly tapped by institutions, financial planners advise individuals to park their surplus money in them so that idle cash can earn more than what they would from a savings account.

However, the rules are silent on the extent of credit risk these funds can take. Fund managers can use their discretion to invest in higher yield instruments of issuers whose repayment capability may not be robust.