Instant Redemption Liquid Funds (2020) Rs 50,000 per day: Is it Good?

Does instant mutual fund redemption interest you? I am sure many would be interested. And yes its possible.

Some liquid mutual funds offer instant redemption facility in India (2020).

Several AMCs provide this useful facility. You get to access and withdraw your money by redeeming liquid funds anytime 24×7.

Funds offering this facility are commonly known as instant redemption liquid funds or more generally, instant redemption mutual funds.

So what exactly is this Instant Redemption facility of Liquid Funds and what is instant redemption fund meaning? And more importantly is liquid funds instant redemption good for everyone?

Let’s try to answer these questions.

Instant redemption in Liquid Funds (2020)

Under this instant redemption facility (or insta redemption), the investors can instantly withdraw a maximum of Rs 50,000 or 90% of the invested amount (whichever is lower) per day per scheme from liquid funds.

This is the broad meaning of instant mutual fund redemption. And how to redeem liquid funds instantly and how exactly does this work?

Suppose you have Rs 1 lac in an instant redemption mutual funds (liquid fund). Then you can ‘instantly’ redeem only Rs 50,000 in a day – which is the upper limit of instant redemption in the liquid funds. But let’s say your liquid fund balance instead was Rs 50,000, then you could only withdraw lower of the two among Rs 50,000 or 90% of your investment, i.e. 90% of Rs 50,000 = Rs 45,000. So you would get instant redemption in this case of only Rs 45,000.

Note that we are talking about limits on the ‘instant’ redemption in instant redemption liquid funds facility. The regular redemption (which has not upper cap) is still allowed.

Also the maximum limit of instant redemption mutual funds is Rs 50,000 per day per Liquid fund scheme. So you can always invest multiple Rs 50,000 in various liquid funds if you want to utilize the per scheme limit. Though convenience would be an issue as per what I think.

What about this facility in other debt funds?

SEBI only allows instant redemption facility for liquid funds and no other debt fund categories. So only instant redemption mutual funds can be the instant redemption liquid funds. Earlier, few other debt fund categories also offered this instant redemption facility. But a few years back, SEBI sensed the disconnect between fund portfolio’s maturity profile and fund house’s ability to offer insta redemption all the time. As a result, it was decided to restrict the facility of instant redemption to liquid funds only. That too with a per day limit on each liquid fund scheme.

How quick is the instant redemption process?

Within minutes via the IMPS route and the money is wired to the linked savings bank account.

Under normal circumstances, you get the money back in a day or two when you redeem/sell your liquid funds. But if the fund house is giving debt fund instant redemption facility on its liquid funds, then the money is paid out almost instantly via the IMPS route up to the limit of Rs 50,000 per scheme.

What about NAV at redemption?

As usual, it depends on when exactly during the day is the redemption request placed.

If the redemption request is placed before the cutoff time, then the same day’s or the previous day’s NAV, whichever is lower, will be applicable. In case request is placed after the cut off time, the same day’s or next day’s NAV, whichever is lower, will be applicable.

So why this whole discussion around liquid funds and savings account?

Savings account interest rates falling. In fact, interest rates are falling in general. So people are looking for ways to enhance the returns on surplus money lying with them. I was in fact getting regular mails asking whether liquid funds can be used as offer instant redemption facility and which are the best instant redemption funds and which are the best liquid funds with instant redemption. So I thought about discussing a little more about these instant redemption mutual funds.

The instant redemption facility has been available for a couple of years now and it has no doubt made liquid funds more attractive. Especially as an alternative to savings bank account. There are other options too like Sweep in Accounts where money above a threshold limit is converted into a fixed deposit automatically to earn.

People invest in Liquid funds as it gives potentially higher returns than a regular savings bank account with non-zero but very low risks. Why low risk? Because as per SEBI’s guidelines, liquid funds are allowed to invest in highly liquid instruments with a residual maturity of not more than 91 days).

But when talking of returns, taxation should also be discussed.

True that liquid funds can give higher returns than savings account. But taxation changes things a bit.

Savings Account interest income is tax free up to Rs 10,000 per financial year (Under Section 80TTA). So let’s say you savings account is giving you 3.5% interest, then you can keep up to Rs 2.85 lac so that your interest income of Rs 10,000 is tax free. Many new and small banks offer higher rates of up to 6%. So if let’s say your savings account is giving you 5.5% interest, then keeping just Rs 1.82 lac would be sufficient to generate Rs 10,000 tax-free savings account interest.

On the other hand, debt funds returns are taxed. The returns from liquid funds are treated as capital gains. So if you redeem units of liquid funds (via instant redemption or regularly) within 3 years of investing, then the gains are treated as short term capital gains and taxed as per your income tax slab rate. So if you are in 30% tax bracket, then you pay 30% tax on the returns generated from liquid funds. But if you redeem after 3 years, the gains are taxed at 20% with indexation benefit. That’s how debt fund taxation works.

Another aspect in liquid funds is exit loads. As of now, graded exit loads of liquid funds are levied on investors. These start from 0.0070% from first day and go down to 0.0045% on sixth day. The graded exit load becomes nil from seventh day onwards. So the exit load also reduce returns a bit if you are redeeming liquid funds within the first 7 days.

So you can say that these are the liquid fund redemption rules (2020) for exit loads and taxation.

Liquid funds have been advised many times as alternative to savings account. And rightly so. But liquid funds are not risk free like savings account. These are market-linked instruments and hence always carry some degree of risk. So even if you want to pick a good liquid fund or want to know How to choose debt fund in 2020, then you need to be careful. High returns should never be the main factor for selecting liquid funds or other debt funds. Safety is paramount when picking debt funds. So don’t base your search of best instant redemption funds or best liquid funds with instant redemption facility only on past returns.

So What Should You Do?

Different people require different strategies. The instant redemption facility does help provide better liquidity. So liquid funds with instant redemption are pretty useful.

But for me, it can’t simply replace my savings accounts. This is my personal view. Saving account has a different purpose and that is just to provide liquidity and park some cash temporarily. It is not a place to park large amount of money in any case for long periods of time. So I will still use my savings account.

How much should one park in savings account?

Its up to the individual. But from tax-free interest perspective, an amount that is likely to generate Rs 10,000 annual interest from savings account is sufficient. Rest of the money can be in liquid funds or sweep in deposits or fixed deposits (which have instant redemption facility now a days). Liquid funds can be particularly useful for parking large balances in a tax-efficient manner for those in high-tax bracket.

But in general, its not about savings account vs liquid funds. For most people, it can easily be savings account and liquid funds. And if the liquid fund you pick has instant redemption facility (i.e. instant redemption liquid funds) to a park of your money anytime 24×7, then good for you.

A simple combination of savings account, bank FDs and liquid funds can be a structurally good for parking your emergency fund in a manner which balances liquidity as well as post-tax returns.

So that was about the meaning of instant redemption liquid funds (2020). Hope you now understand how the instant redemption mutual funds work and how to redeem liquid funds instantly. But yes, don’t just write off the plain old savings account. It’s still pretty good for what it does best.

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