Liquid Plus Schemes No Longer An Attractive Option For Indian Inc, Banks

2019/08/27

Liquid plus schemes have been an ideal avenue for banks and India Inc to park their surplus funds until now. Continuity of the above however seems to be short lasted after the capital market regulator ordered the MF’s to value the money market and debt securities above 91 days on mark to market basis. Unlike liquid funds which constitute of the securities with a very short maturity, liquid plus funds majorly comprises of instruments with slightly higher maturities i.e. 91 days and above. In addition to the above, RBI deputy governor Shymala Gopinath has also hinted that tax benefits on fixed income funds might go, to bring them on par with FD’s. This has proved to be a double blow for the Liquid plus funds.

Valuing the securities above 91 days maturity on MTM basis……….What does it mean???

Mark-to-market is an accounting practice that values securities based on their prevailing market price. AUM is calculated as the sum of net mark-to-market gains or losses incurred by funds plus fresh net investment inflows. Until now there was no restriction on the MTM limit for liquid plus funds as opposed to liquid funds that had the 10% MTM limit. This would result in to bringing the NAV of the LPS closer to prevailing volatile market prices.
The tax advantage enjoyed by Liquid plus schemes until now….
Liquid plus funds are more tax savvy as compared to liquid funds and bank FD’s. DDT of 28.33% is charged on liquid funds, whereas it is 14.16 % for liquid plus funds. That is a huge difference. On the other hand Interest income on bank FD’s is taxed at 33%.

The victims…MF’s, Banks, Indian Corporate sector

SEBI’s order has proved to be a downer not only for mutual funds but for banks and corporate sector as well. Liquid plus schemes, comprises of almost 40% of the assets under management of mutual fund industry. Since the time liquid plus schemes came in to existence, they have caught investors fancy. This is mainly due to higher returns and the tax advantage that LPS boasts of vis-à-vis its counter parts i.e. liquid schemes and FD’s. Liquid schemes and bank FD’s give returns around 4-4.5%, whereas LPS gives returns of 5-5.5%. Mutual fund fear that this order will result in to large scale redemptions by investors from liquid schemes. Whereas, companies and banks will now have to search for an alternate route to park their excess funds.

The saving grace………

The proposed guidelines for MTM for securities over 91 days maturity and removal of tax sops given to liquid plus funds  will come in to force from 1st July 2010. Till that time, mutual funds can come with other innovative products. Also the fund managers can identify the securities that are less volatile and include them in their portfolio.

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