Impact of Stamp Duty on Liquid Funds


With the recent SEBI circular about stamp duty changes, since 1st July, 2020... all money market and debt securities are being valued daily on a market to market (MTM) basis i.e. as per their current market prices. This changes the way returns are calculated for debt mutual funds and may be more noticeable in liquid funds. Earlier debt securities which would mature in the next 30 days, were valued on calculated prices (amortization basis).

For example: Let's say debt securities maturing in the next 30 days would generate 3% return. So as per amortization, your daily return would be 3%/30 i.e. 0.1% irrespective of the market price of these securities. Thus, these securities generated stable returns every day without experiencing any undue volatility due to market considerations, before 30th June.

But, in general, market prices of debt securities are susceptible to various factors like interest rate action, market uncertainty, debt servicing ability of institutions etc. So, there might be some volatility in returns generated by short maturity debt mutual funds due to prevailing market conditions going forward.

Liquid funds in general have a greater proportion of their portfolio invested in money market and debt securities with less than 30 day residual maturity. So daily returns on these schemes which used to be stable and positive in general, might end up being a little volatile now. Other debt categories would not be much impacted by these changes as most of these funds have securities with more than 30 day residual maturity which were already being valued on an MTM basis. 

To reduce the impact of this move, try to match your holding period with the maturity of the debt fund. Returns earned in such cases should be similar to the fund's yield to maturity. Typically, park your money in liquid funds for at least 30-40 days. If you want to park your surplus for less than a month then consider doing it in overnight funds as they have zero exit load and no mark to market implication.

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