In a significant development, SEBI has allowed Research Analysts (RAs) to use liquid mutual funds and overnight mutual funds as an alternative to scheduled bank deposits for meeting their mandatory deposit requirements. This article provides a comprehensive technical analysis of this new option.
Regulatory Basis
The circular dated August 12, 2025 (SEBI/HO/MIRSD/MIRSD-PoD/P/CIR/2025/116) on "Use of liquid mutual funds and overnight mutual funds for compliance with deposit requirement by Investment Advisers and Research Analysts" permits IAs and RAs to use liquid mutual funds and overnight mutual funds, as an additional option to bank deposits.
Why This Change Was Introduced
Based on representations from industry participants and inputs received through public consultation, the SEBI Board approved the proposal to allow IAs and RAs to use liquid mutual funds and overnight mutual funds for compliance with deposit requirements. This provides:
- Higher Returns: Mutual funds typically offer better returns than bank deposits.
- Liquidity: Liquid and overnight funds offer high liquidity.
- Flexibility: RAs have more options for managing their deposit.
Types of Mutual Funds Permitted
1. Liquid Mutual Funds
Liquid mutual funds invest in money market instruments with a maturity of up to 91 days. They offer:
- Higher returns than bank deposits.
- Low risk.
- High liquidity.
2. Overnight Mutual Funds
Overnight mutual funds invest in overnight securities with a maturity of one day. They offer:
- Minimal risk.
- High liquidity.
- Lower returns than liquid funds.
Comparison: Bank Deposit vs Mutual Fund Units
| Parameter | Bank Deposit | Liquid Mutual Fund | Overnight Mutual Fund |
|---|---|---|---|
| Returns | Fixed, lower | Variable, higher | Variable, lowest |
| Risk | Low | Low to Moderate | Minimal |
| Liquidity | Low (FD) | High | Highest |
| Lien Marking | Yes | Yes | Yes |
| Compliance | Easy | Moderate | Moderate |
Implementation Requirements
1. Lien Marking
The deposit must be marked as a lien in favour of RAASB, in the manner and form as may be specified by RAASB.
2. Compliance Timeline
RAs shall comply with the deposit requirements latest by September 30, 2025.
3. RAASB Systems
IAASB/RAASB (BSE Limited) is directed to put in place necessary systems and procedures for implementation of the provisions.
Benefits of the Mutual Fund Option
| Benefit | Description |
|---|---|
| Higher Returns | Potential for better returns compared to bank deposits. |
| Liquidity | Easy to redeem if needed. |
| Flexibility | More options for managing deposits. |
| Professional Management | Managed by professional fund managers. |
| Diversification | Investment in a diversified portfolio. |
Risks and Considerations
| Risk | Description |
|---|---|
| Market Risk | NAV can fluctuate. |
| Liquidity Risk | May face liquidity issues in extreme market conditions. |
| Lien Marking | Must ensure proper lien marking. |
| Compliance | Must comply with RAASB procedures. |
Steps to Implement Mutual Fund Deposit
- Choose a Fund: Select a liquid or overnight mutual fund.
- Invest: Invest the required deposit amount.
- Mark Lien: Ensure the units are marked as a lien in favour of RAASB.
- Inform RAASB: Inform RAASB of the deposit.
- Monitor: Monitor the investment and ensure compliance.
Conclusion and How Anuj Desai & Associates Can Help
The new mutual fund option provides RAs with more flexibility in meeting deposit requirements. However, proper implementation requires careful planning and compliance.
Anuj Desai & Associates offers specialized services to help RAs implement the mutual fund deposit option:
- Guidance on selecting the appropriate mutual fund.
- Assistance with lien marking and documentation.
- Compliance audit and advisory.
Contact us today to implement the mutual fund deposit option. Our team will guide you through the process and ensure full compliance.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers are advised to consult qualified professionals for legal and compliance matters. Anuj Desai & Associates is a SEBI compliance consulting firm based in India.