Choose the right fund to park your short term surplus

Treading on the same path, the SEBI is now planning to further tighten the noose by imposing mark-to-market (MTM) requirements for instruments with a residual maturity period of 60 days and more. Eventually the idea behind such changes is to get all the instruments irrespective of their tenure and type to be quoted on market rates and the net asset value (NAV) calculated accordingly. Moreover, the RBI and SEBI have repeatedly expressed concerns about banks and corporates round-tripping investments (continuous and frequent purchase and sale of securities) using liquid funds. Fund houses have lost significant money in liquid funds since RBI capped banks� investments in liquid funds at 10% of their net worth in May 2011.

 

 

 

 

 

 

 

 

 

The reason for such policy initiative

The MTM valuation of securities irrespective of their nature will help prevent systemic risk for mutual funds in case of heavy redemptions by institutional investors leading to winding up of their business (example cited above). Also, this move if implemented will make the mutual funds industry less dependent on institutional money but on the flipside, liquid funds and more so liquid plus schemes may lose appeal among the high-value investors as there will more volatility due to the price movements in short term papers.

Our view:

We believe that this proposal if implemented by the SEBI will have impact on mainly the liquid plus schemes holding papers of more than 60 days of maturity. Generally liquid funds may not face volatility unless the average maturity turns out to be greater than 60 days. However, if SEBI introduces a complete overhaul in the valuation of securities making them mark-to-market irrespective of their tenure may make liquid and liquid plus schemes unattractive to investors.

Hence, investors now should be careful while selecting the right debt mutual funds suiting their needs and investment time horizon. If all the securities irrespective of their tenure are made mark-to-market then the investors would be better off parking their short term surplus under savings bank account due to deregulation of savings bank account interest rates.

- Personalfn.com

(PersonalFN is a Mumbai-based personal finance website)