Debt mutual funds have been in the news for all the wrong reasons. IL&FS crisis was the start but subsequent crises exposed poor management in debt funds. For the first time, we saw Liquid and Money Market funds losing 6-12 months of returns in a matter of a couple of days. In the case of certain corporate bond and duration funds, we saw NAVs full by as much as 50% in a single day.
In light of these crises, SEBI took a series of measures to ensure safety in debt funds. Recently it had announced a set of measures that would impact liquid funds, and we now have the final framework.
- A graded exit load will now be applicable for all liquid fund redemptions within 7 days. Meaning the exit load will gradually decrease till the 7th day. This will be applicable 30 days from today.
- Liquid funds now should hold 20% of their net assets in liquid assets such as Cash, Government Securities, T-bills and Repo on Government Securities. This will be applicable from April 1, 2020.
- Liquid and Overnight funds now cannot invest in short term deposits of scheduled commercial banks.
- Liquid funds now also cannot invest in debt securities having structured obligations (SO rating) and/or credit enhancements (CE rating).
Liquid funds were predominantly used by corporates and trades fro treasury management and parking surplus cash. With the imposition of an exit load, liquid funds can no longer be used for parking cash for short periods of time.
You can use overnight funds.
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No. Liquid funds are currently giving a return of 6-6.3%. But the returns of overnight funds will be closer to the repo rate set by the RBI which is currently 5.4%. The reason is overnight funds can only invest in securities with maturities of up to 1 day. But liquid funds can invest in securities with maturities of up to 91days.