Market regulator Sebi issued a circular in 2017 on immediate redemption of liquid funds, allowing investors to save up to ₹50,000 or 90% of the money parked in a liquid fund per day, whichever is lower. Many fund houses like PPFAS, Nippon, Shriram, Bajaj, ICICI, HDFC and SBI offer this facility.
Instant redemption liquid mutual funds 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 immediate repayment work?
The instant redemption feature allows investors to make immediate withdrawals from liquid funds, usually via the asset manager’s website. Sandeep Agarwal, head of fixed income at Sundaram Mutual, clarified: “Immediate repayment is available only to resident Indians. Investors can invest up to a maximum of ₹50,000 or 90% of the investment in the scheme per day, whichever is lower. The payouts are processed directly through IMPS and the facility is available 24/7.”
Also read | Star Health vs Manipal Cigna vs SBI General: Which health insurer stands out?
“For redemption requests placed before 3:00 p.m., the previous day’s NAV or the current day’s NAV will apply, whichever is lower. For requests placed after 3pm, the NAV of the same day or the NAV of the next day will apply, whichever is lower,” he added. However, it is important to note that non-immediate repayments are processed on the usual T+1 basis.
Instant redemption vs sweep-in FDs
While sweep-in FDs automatically add the excess money in your savings account to fixed deposits, redemption of liquid funds requires manual intervention. The sweep-in feature is managed by the bank, which knows your bank balance. Liquid assets, on the other hand, require self-service.
What about returns?
Liquid funds offer superior returns. Agarwal said, “Typically, returns from liquid funds are 25 to 50 basis points above the repo rate. For example, if you have parked ₹1 lakh in a savings account for a year, assuming an interest rate of 3%, would be the annual return ₹3,000. This amount is tax-free until ₹10,000 under current tax laws.
“A liquid fund with a return of 7%, on the other hand, would generate returns ₹7,000 before taxes. After applying a tax of 30%, the return drops to ₹4,900, which translates into an effective return of 4.9%. This means that even after taxes, liquid funds offer higher returns, making them a good option for those looking for better returns on surplus funds.”
Also read | The psychology of risk: perception versus reality
Some banks offer higher returns on savings accounts, but these require you to maintain a large minimum balance. For example, the AU Small Finance bank offers a 7.5% return on savings accounts if you maintain a balance between them ₹1 crore and ₹5 crores.
Security and transparency
One area where savings accounts come out on top is safety. The RBI’s deposit insurance covers maximum ₹5 lakh, they provide a safety net that is not available in liquid funds. On the other hand, liquid funds offer transparency and diversification, which can help reduce risk. As per Sebi guidelines, liquid funds can only invest in debt and money market securities with a maturity of up to 91 days. Portfolios are disclosed in monthly fact sheets, and a single credit event will not wipe out the entire corpus.
“Even in standard scenarios, exposure to risky securities in a diversified liquid fund is minimal. On the other hand, deposits exceed ₹5 lakh in a bank are uninsured, exposing larger balances to systemic risk,” said Harshad Chetanwala, co-founder, Mywealthgrowth.com
Why is immediate repayment not used enough?
Despite the benefits, immediate repayment from liquid assets remains underutilized. Chetanwala attributed this to factors such as limited awareness and emergency-oriented design of the feature. Additionally, the T+1 liquidity from regular redemptions of liquid funds is often sufficient for most needs, reducing the perceived need for immediate access. “As awareness increases, more and more investors are exploring liquid funds and many are using this feature,” he added.
Also read: Can you withdraw the pension portion from your EPF?
Harsh Roongta, a Sebi registered investment advisor, said another reason is that you cannot transfer money from liquid assets directly to family or friends. “That’s why many investors remain more comfortable with savings accounts, even though liquid funds offer better returns,” he added.
Final thoughts
Instant redemption liquid funds are an attractive alternative to savings accounts and sweep-in FDs for emergency liquidity and excess cash management. However, there are trade-offs that require careful consideration.
