The Securities and Exchange Board of India has expressed concern over a recent step by select mutual fund houses to allow investors the option of instant withdrawal from their liquid schemes.
A few fund houses have started offering retail investors the option to withdraw upto Rs 2 lakh in a day to meet their urgent needs.Investors opting for this facility get money in their bank accounts via the IMPS (immediate payment service) route. The regulator feels this facility of instant redemption is akin to a bank account dispensing money on demand.
Sebi has in international forums always taken a stand that Indian mutual fund industry should not be categorised as shadow banking entity, as it is a pass-through vehicle.
“Mutual funds as pass-through vehicles invest in transferable securities and other specified assets. All profits and losses belongs to the investors, leverage is not allowed and it can also not lend,” clarified an official.
The regulator feels by providing this instant withdrawal facility it may attract international attention. Sebi’s view is that there should be additional prudential and supervisory norms for mutual funds.
Liquidity management is also another issue which the regulator is concerned about. “Fund houses can’t use their own money to meet redemption requirements. Money should come from the investments they have made. Sebi is very clear that this facility should meet the requirement of an investment product,” said a person familiar with the development.
At present, there is also no uniformity among the mutual funds who are offering this instant withdrawal facility as applicability of net asset value (NAV) is different for each of them. Some of fer previous day’s NAV,while others offer either the day’s NAV or future NAV.
“It was discussed that if day-end NAV is applied then some investors may misuse the facility to earn return on same amount at two places. If last available NAV is applied investors again can misuse the facility in case of falling markets. This is being worked out to ensure that investors cannot misuse this facility,” said another person who is involved in the discussion.
One of the suggestions is that either the last available NAV or prospective NAV whichever is lower could be applied to ensure that investors don’t misuse this facility.
The thinking in Sebi is while calculating the NAV for instant withdrawal fund houses must ensure that interest of the remaining investors
in the scheme should not be affected and they are treated fairly.
Fund houses are currently managing the liquidity requirement out of the non-deployed fund at the end of the day or by deferring the withdrawal of their fees from the schemes.