Liquid funds can’t think long now

MUMBAI: The Sebi Mutual Fund Advisory Committee has proposed restrictions on the tenure of debt instruments held by liquid funds to prevent the recurrence of panic witnessed in October. The representatives of industry and investor associations have suggested that liquid funds should not hold securities with a maturity of more than 90 days so that the fund remained ���truly liquid���.

Fixed Maturity Plans (FMPs) and liquid schemes were affected the most by a tsunami of redemption requests in October. A large chunk of portfolios was invested in papers with maturity ranging from six months to a year. So the sudden redemption requests compelled the fund houses to resort to a fire-sale of those illiquid papers. Mutual fund houses prefer to invest in papers of a longer maturity, as these offer better rates of interest. Sebi had issued a directive last week prohibiting close-ended debt schemes from investing in securities with maturity exceeding that of the scheme.

The committee also discussed the proportion of money to be compulsorily deployed in bank fixed deposits and treasury bills. Currently, a scheme cannot invest more than 20% of its funds in bank FDs and treasury bills put together. At the same time, a fund manager is permitted to take zero exposure to these instruments. The mutual fund industry has proposed raising the limit to 30% so as to meet unforeseen higher-than-normal redemption pressures without resorting to fire-sale of illiquid assets.

Liquid funds prefer to invest in certificates of deposits (CDs) over FDs as the former are tradable and transferable, while FDs are non-transferable. CDs are also preferred over treasury bills because of their higher yield. ���The belief in CDs��� liquidity has been somewhat shaken by the refusal of banks to advance funds against them. In comparison, you can rest assured that banks will honour requests for a premature withdrawal of FDs,��� said a fund manager.