Liquid assets requirement

A debt scheme can be fully invested in corporate bonds and still be unable to meet redemptions on a bad day, if none of those bonds can be sold quickly at a fair price. SEBI's answer is a floor: every open-ended debt scheme, with a short list of exceptions, must keep a slice of its portfolio in assets it can turn into cash almost immediately.

That slice is the liquid assets requirement, and it sits alongside — not instead of — each debt category's own investment-mix rules.

SEBI requires that all open-ended debt schemes, except Overnight Fund, Liquid Fund, Gilt Fund and Gilt Fund with 10-year constant duration, hold at least 10 percent of their net assets in liquid assets.

"Liquid assets" for this purpose means a defined, narrow list: cash, government securities, T-bills, and repo on government securities — not just anything that trades easily. Corporate bonds, however highly rated, do not count towards this 10 percent, however liquid the market for them might be on a given day.

The four exempted categories are exempted for the same reason: an Overnight Fund, a Liquid Fund, and the two Gilt Fund variants are already built almost entirely out of the same kind of instruments this rule is trying to guarantee a minimum slice of, so a separate floor would be redundant.

A Banking and PSU Fund — which must otherwise keep at least 80 percent of assets in debt instruments of banks, PSUs, PFIs and municipal bonds — runs a portfolio of Rs 2,000 crore.

Because it is not one of the four exempted categories, it must hold at least:

10% × Rs 2,000 crore = Rs 200 crore

in cash, government securities, T-bills or repo on government securities — even though its 80 percent sectoral mandate is comfortably met by bank and PSU bonds alone. If the fund manager instead put that Rs 200 crore into more PSU bonds to chase yield, the scheme would breach the liquid assets requirement, whatever its credit quality or its sectoral compliance looks like.

A Liquid Fund of the same Rs 2,000 crore size carries no such separate 10 percent floor — its own category rules on maturity and instrument type already keep it liquid by construction.

Chapter 10 (Mutual Fund Products), in the debt-fund categorisation section, states this rule as a general condition applying across the listed debt categories, immediately after defining Credit Risk Fund, Banking and PSU Fund, Gilt Fund and Floater Fund. Expect a question naming a debt category and asking whether the 10 percent liquid-assets floor applies to it, or listing which instruments count towards the 10 percent.

• The exemption list is exactly four categories: Overnight, Liquid, Gilt, and Gilt with 10-year constant duration. Every other open-ended debt category carries the 10 percent floor.
• "Liquid assets" here means cash, G-secs, T-bills and repo on G-secs — a narrow, defined list, not a general description of easily-tradable securities.
• Highly rated corporate bonds do not count, however easily they trade in practice.
• This is a portfolio-composition rule, distinct from a scheme's own credit-quality or minimum-investment mandate (such as a Gilt Fund's 80 percent in G-secs) — a scheme must satisfy both, not one instead of the other.
• Do not confuse this with a household "liquid assets" ratio — that is an unrelated personal-finance concept about a family's own emergency fund, not a SEBI portfolio rule for a scheme.