On 30 July 2021, SEBI permitted AMCs to extend an instant access facility (IAF) in overnight fund schemes. Previously, fund houses were permitted to offer this facility in just liquid schemes.
Why is It Significant?
- Instant Access Facility or IAF allows to credit redemption proceeds in an investor’s bank account on the day of his/her redemption request.
- SEBI has tweaked the existing framework pertaining to the treatment of dividends and unclaimed redemption amounts.
- Market regulator SEBI said that AMCs/MFs could offer IAF only in liquid and overnight schemes.
| But what are liquid mutual funds and overnight funds?
Liquid mutual funds are debt funds that invest in fixed-income generating instruments, such as government securities, commercial paper, treasury bills, among several others. These investment instruments come with a maturity of 91 days.
An overnight fund is a debt fund that invests overnight assets – securities with a maturity period of just one day. Therefore, these funds invest in overnight reverse repos, Collateralised Borrowing and Lending Obligations (CBLOs), and numerous other money market securities with a one-day maturity.
A Closer Look
The market regulator also added that the dividend amounts and unclaimed redemption can be deployed in just money market or call money market instruments.
However, one can now invest in a different plan of liquid, overnight, and money market schemes by mutual funds, particularly to deploy the unclaimed sum.
Additionally, the same will apply to only those aforementioned mutual fund schemes that come under the A-1 cell of potential risk class matrix, with relatively low credit risk and interest rate.
Market regulator SEBI permitted asset management companies to extend instant access facility (IAF) in overnight mutual fund schemes. Earlier, fund houses were permitted to offer IAF only in liquid schemes.
Moreover, SEBI added this IAF-related framework would be applicable with immediate effect. On the other hand, those pertaining to dividend and unclaimed redemption amounts will come into effect from 1 December 2021.
Frequently Asked Questions
- How are overnight mutual funds taxed in India?
Overnight funds offer dividend income to the investors, which is not taxable in India. However, taxation on capital gains depends on the holding period of investment units. If an investor sells his/her mutual fund units after 3 years, it is considered as a long-term capital gain, which is taxable at the rate of 20% alongside indexation benefits. On the other hand, when investors sell units before a holding period of 3 years, they attract a short-term capital gains tax as per the individual’s income slab rate.
- What is the difference between debt funds and liquid funds?
Debt funds belong to the mutual fund category that invests primarily in fixed-income securities. Liquid funds are a subset of debt fund schemes that invest in fixed securities with a very short maturity period.
- Is it safe to invest in overnight mutual funds?
These funds come with a short investment horizon. Additionally, they are not exposed to high-risk securities and assets. As a result, these funds have low risks, making them ideal for risk-averse investors with an extremely short investment horizon.
- What is the minimum redemption amount for overnight investments?
There exists no such requirement. Investors can redeem as many units as they want.