It\u2019s noteworthy that around 1\/5th<\/sup>\nof industry\u2019s AUM lies with liquid funds; and according to media reports nearly\n30% of money flowing into liquid funds moves out within the first seven days. <\/p>\n\n\n\n Is SEBI overregulating?<\/p>\n\n\n\n No! In fact, mutual funds have\nshot themselves in the foot. <\/p>\n\n\n\n (Read:<\/strong> How SEBI\u2019s New Norms For Debt Mutual Funds Make a High Impact )<\/a><\/p>\n\n\n\n Here\u2019s the background\u2026<\/strong><\/p>\n\n\n\n The capital market regulator gave\nfund houses multiple opportunities to correct their modus operandi. It expected\nthem to observe stricter self-regulatory processes. Unfortunately, mutual fund\nhouses seem to have taken the market regulator for granted. <\/p>\n\n\n\n Post the IL&FS, DHFL,\nReliance ADAG, and Essel Group debt episodes, SEBI moved swiftly in making the\nmutual fund industry more accountable for their actions. And left with no other\nchoice, SEBI took a stern stance on the risk management processes followed by\nmutual funds, and rightly so. After all, protecting investors\u2019 interest is one\nof its topmost priorities. <\/p>\n\n\n\n Whether or not it\u2019s a wise idea\nisn\u2019t really the question. <\/p>\n\n\n\n Risk-return\ntrade off\u2014debt schemes\u2026<\/strong><\/p>\n\n\n\n (For illustration purpose only)<\/p>\n\n\n\n Overnight funds<\/a> is a category of debt scheme emerged after the\u00a0SEBI’s recategorization norms<\/a>.<\/p>\n\n\n\n As per the SEBI\u2019s circular dated October 06, 2017<\/a>, overnight funds are\nopen-ended debt schemes investing in overnight securities with a maturity of\none day. They are typically money market instruments, viz. Treasury bill\n(T-Bills) and Collateralised Borrowing and Lending Obligations (CBLOs).<\/p>\n\n\n\n In comparison, liquid funds<\/a>, by the regulator\u2019s definition, are supposed to invest in debt and money market instrument papers with a maturity profile of up to 91 days. The investment basket of\u00a0liquid funds<\/a>\u00a0is quite diverse. So they invest in a variety of instruments such as Certificate of Deposits (CDs) and Commercial Papers (CPs), which also carry higher risk as compared to other overnight instruments.<\/p>\n\n\n\n Hence, the primary difference is\ninvestment preferences based on the maturity profile of the type of credit\ninstrument. <\/p>\n\n\n\n The return potential of an\novernight fund is typically compared to the prevailing interest rates in the\novernight markets. In other words, they might generate returns in line with the\nrepo rates and inter-bank lending rates in the overnight market, under normal\nconditions.<\/p>\n\n\n\n Thus, even after SEBI\u2019s new rules\nwere applicable for liquid funds, their return potential is still better than\nthat of overnight funds, at least on the paper. If the future returns fail to\nincrease 1.0% to 2.5% higher than those of overnight funds, liquid funds may\nsoon become unpopular. Liquidity conditions and credit environment may dominate\nthe investor preferences. <\/p>\n\n\n\n Nonetheless if money, which is\notherwise parked in liquid funds, finds its way in FDs, capital cost of banks\nmight go down because Current Account and Savings Account (CASA) is the\ncheapest source of funding for them. As a result, the Net Interest Margin (NIM)\nof banks may improve. In the past, banks have faced intense competition by\nSmall Savings Schemes and mutual funds. <\/p>\n\n\n\n As you might be aware, Mutual\nFund schemes are mandated to invest only in listed NCDs and this would be\nimplemented in a phased manner. All fresh investments in Commercial Papers\n(CPs) shall be made only in listed CPs pursuant to issuance of SEBI\u2019s guidelines\nin this regard.<\/p>\n\n\n\n This rule might push corporates to\nswitch to banks to satisfy their short-term credit requirements as listing of\nNCDs will involve additional costs, which may not be feasible for short-tenure\ncredit instruments. <\/p>\n\n\n\n![\"\"](\"http:\/\/blog.certifiedfinancialguardian.com\/wp-content\/uploads\/2019\/07\/cfg-graph-8-7-2019.png\")
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