Instant-redemption liquid funds: better than savings accounts or sweep-in FDs?
Source: Live Mint
Markets regulator Sebi issued a circular on instant redemption in liquid funds in 2017, allowing investors to withdraw up to ₹50,000 or 90% of the money parked in a liquid fund per day, whichever is lower. Many fund houses such as PPFAS, Nippon, Shriram, Bajaj, ICICI, HDFC and SBI offer this facility.
Liquid mutual funds with instant redemption may seem like a good alternative to traditional savings accounts and sweep-in fixed deposits (FDs) as they offer higher returns. But are they really better? Let’s find out.
How does instant redemption work?
The instant redemption feature allows investors to withdraw money from liquid funds instantly, typically through the asset management company’s website. Sandeep Agarwal, head of fixed income at Sundaram Mutual clarified, “Instant redemption is only available to resident Indians. Investors can withdraw up to ₹50,000 or 90% of the investment in the scheme per day, whichever is lower. The payouts are processed instantly via IMPS, and the facility is available 24×7 on all days.”
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“For redemption requests placed before the 3 pm, the previous day’s NAV or the current day’s NAV applies, whichever is lower. For requests placed after 3 pm, the same day’s NAV or the next day’s NAV applies, whichever is lower,” he added. However, It is important to note that non-instant redemptions are processed on the usual T+1 basis.
Instant redemption vs sweep-in FDs
While sweep-in FDs add surplus funds in your savings account to fixed deposits automatically, liquid fund redemption requires manual intervention. The sweep-in feature is controlled by the bank, which knows your bank balance. Liquid funds, on the other hand, require self-service.
What about returns?
Liquid funds do offer superior returns. Agarwal said, “Normally, returns from liquid funds are 25-50 bps above the repo rate. For instance, if you parked ₹1 lakh in a savings account for a year, assuming a 3% interest rate, the annual return would be ₹3,000. This amount is untaxed up to ₹10,000 under current tax laws.
“In contrast, a liquid fund yielding 7% would generate ₹7,000 before tax. After applying a 30% tax, the return drops to ₹4,900, translating to an effective return of 4.9%. This means even after accounting for taxes, liquid funds offer higher returns, making them a good option for those seeking better yields on surplus funds.”
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Some banks offer higher returns on savings accounts but these require you to maintain a large minimum balance. For example AU Small Finance bank offers a 7.5% return on savings accounts if you maintain a balance between ₹1 crore and ₹5 crore.
Safety and transparency
One area where savings accounts come out on top is security. With the RBI’s deposit insurance covering up to ₹5 lakh, they provide a safety net that’s unavailable in liquid funds.On the other hand, liquid funds offer transparency and diversification, which may help reduce risk. According to Sebi guidelines, liquid funds can only invest in debt and money market securities with maturity of up to 91 days. Portfolios are disclosed in the fact sheets released every month, and a single credit event won’t wipe out the entire corpus.
“Even in default scenarios, exposure to risky securities in a diversified liquid fund is minimal. On the other hand, deposits exceeding ₹5 lakh in a bank are uninsured, exposing larger balances to systemic risk,” said Harshad Chetanwala, co-founder of Mywealthgrowth.com
Why is instant redemption underused?
Despite its benefits, instant redemption from liquid funds remains underutilised. Chetanwala attributed this to factors such as limited awareness and the feature’s emergency-oriented design. Additionally, the T+1 liquidity of regular liquid fund redemptions often suffices for most needs, reducing the perceived necessity of instant access. “With increasing awareness, more investors are exploring liquid funds and many are using this feature,” he added.
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Harsh Roongta, a Sebi-registered investment advisor, said another reason is you can’t directly transfer money from liquid funds to family or friends. “That’s why many investors remain more comfortable with savings accounts, even though liquid funds provide better returns,” he added.
Final thoughts
Liquid funds with instant redemption are a compelling alternative to savings accounts and sweep-in FDs for emergency liquidity and surplus cash management. However, they have tradeoffs that require careful consideration.
