Personal Finance

SEBI strengthens risk management for liquid funds

The Securities and Exchange Board of India (SEBI) has updated the liquidity norms for liquid funds. SEBI has made it mandatory for liquid funds to hold at least 20% of its nett assets in liquid form. 

To comply with the SEBI norm, the liquid funds can hold liquid assets in cash, government securities, T-bills and repo on government securities.

In a case where the holding of the liquid assets falls below 20% of the nett assets of the liquid fund, the fund cannot make any further investments. For making any further investments, the fund house should first meet the 20% liquidity norm.

Also Read: SEBI: Debt Securities Will Soon Be Marked to Market

SEBI has also barred liquid funds and overnight funds from parking money in:

  1. Short-term deposits of scheduled commercial banks
  2. Debt securities having structured obligations (SO rating)
  3. Credit enhancements (CE rating)

The prohibition mentioned above is against parking money available with the funds but is pending deployment. However, the funds can park such money in debt securities with a government guarantee.

SEBI has further mandated an exit load on investors who exit within seven days of investing in a liquid fund. SEBI has directed the industry body AMFI (Association of Mutual Funds in India) to specify a minimum exit load on a graded basis.

The above norms would apply with effect from 1 April 2020.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in

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