Liquid Mutual Funds in India Loophole
According to Economic Times,
Liquid Mutual funds of India have one loophole and many smart investors are using this loophole to make lots of money without much risk. However, SEBI has banned this loophole now onwards. Here is that loophole.
These investors put money in liquid schemes, where corporates park surplus money for a short term, usually on a Friday or Monday before 12 pm. This helps the investor get the previous day’s net asset value. So, if an investor gives a cheque to the fund house to invest in its liquid scheme before 12 pm on Friday, he would get Thursday’s net asset value (NAV). Similarly, if he puts money before 12 pm on Monday, he would get Sunday’s NAV.
At the time of submitting a liquid scheme application, investors also instruct the mutual fund to switch the investment to a liquid plus scheme the same day (Friday or Monday) before 3 pm. Liquid plus schemes, now known as ultra short-term schemes, invest in debt paper with shorter tenure than liquid funds.
The switch before 3 pm also helps these investors get the liquid plus scheme’s NAV for Friday in addition to the liquid scheme’s NAV for Thursday. If the investor had put money only in the liquid scheme, the return would be generated from next day. But by migrating to liquid plus after a few hours of investing in the liquid scheme, the investor is in a position to earn an extra day’s return.
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