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Mutual funds liquid schemes violate rules

In most cases, fund houses have issued units at the previous day’s NAV

July 05, 2012 10:02 IST | India Infoline News Service
The audit team appointed by SEBI (Securities and Exchange Board of India) has suspected the way several fund houses sell their liquid schemes. According to the audit team, many asset management companies (AMCs) are giving better deals to their select customers by suggesting them to divide their investments into smaller amounts and benefit from the possible price advantage.

Liquid schemes invest in short-term debt instruments with maturities of less than one year. They invest in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between three and six months. A liquid fund provides good liquidity, low interest rate risk and the prevailing yield in the market.

According to the rules, an investor investing Rs. 1 crore or more into a liquid fund is allotted mutual funds units at the same day’s net asset value (NAV), which is roughly the price of a unit. But for smaller investments, units are sold at the previous day’s NAV. In both cases, fund houses will get the money as and when cheques are cleared. The rule was introduced to provide greater flexibility to small investors. But is being misused by some high net worth and institutional investors.

The auditors said that they have come across cases where investors have submitted multiple applications of smaller amounts. For instance, an investor who invests Rs. 2 crore into a liquid fund has submitted four applications and four cheques of Rs. 50 lakh each. And in most cases, fund houses have issued units at the previous day’s NAV. This is against SEBI regulations.

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