InvestorQ : I am having some holdings in liquid funds. Is it true that the mark-to-market rules will reduce my returns on liquid funds?
Dawn Cherian made post

I am having some holdings in liquid funds. Is it true that the mark-to-market rules will reduce my returns on liquid funds?

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Dilmini Mercia answered.
2 years ago
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Recently, the Securities and Exchange Board of India (SEBI) had announced that all debt and liquid funds with maturity of more than 30 days will have to be marked to market. In the past, only securities more than 60 days had to be marked to market. That means liquid funds will also become very volatile in terms of NAV. The other option is that now liquid funds will have to stick to very short term debt of less than 1 month maturity and that would hurt their yields. So investors may actually find liquid funds less attractive in futures. In your case, you could also see the NAVs becoming volatile and also your returns on liquid funds may go down if the fund prefers to stick to very short term debt only.

The idea came up after the FMP fiasco in many AMCs where there was no marking to market and this resulted in the NAV giving an improper picture of the worth of the scheme. Effective April 2020, all debt and liquid funds will have to abandon the amortization scheme for valuing their bond holdings and mandatorily shift to MTM valuation only. The aim is to boost transparency in bond funds and ensure that their values are aligned to the market prices at all points of time. This will ensure that the NAV of such fixed income schemes will fairly reflect the portfolio's value.

There could three implications of this move. With lower yields and lower post tax returns, a lot of short term parking may go back to banks. Secondly, the flows into liquid funds, especially the corporate flows, may actually reduce. For investors like you, there could be a clear case of lower yields and you need to prepare for that.
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