Short term deposits by a scheme

A mutual fund scheme mostly stays invested. Its money sits in the shares, bonds or money-market paper its objective names, not in a bank account.

But two events call for ready cash. Investors redeem their units, and a scheme pays out a declared dividend. For these two jobs, a scheme is allowed to place some money in an ordinary bank deposit, separate from its regular portfolio.

The workbook does not leave this open-ended. It caps both how much can go into such a deposit and how long the deposit can run.

The workbook states the rule in one line: short term deposits must not exceed 20% of the net assets of the scheme, and each such deposit must run for a period not exceeding 91 days. The two limits apply together, not separately — a deposit that fails either one falls outside the rule.

The purpose is also fixed by the same sentence: the deposit may be made only for the purpose of redemption of units or paying dividends to the unit holders. It is not a general cash-management tool, and not a place to park money the fund manager simply has not yet invested.

This sits inside the chapter's wider treatment of net assets: net assets are the market value of the portfolio, plus accrued income, less current liabilities. A short term deposit made under this rule counts as part of that asset base — inside the 20% ceiling — until it matures back into cash the scheme can pay out.

The Konkan Bluechip Fund, an open-ended equity scheme, has net assets of Rs 500 crore. Redemption requests of Rs 60 crore fall due for payout next week, and the fund manager does not want to sell equity holdings at a poor price just to raise that cash.

Under the rule, the scheme can place up to 20% of Rs 500 crore = Rs 100 crore in a short term bank deposit. Placing Rs 60 crore in a 60-day deposit to fund the redemptions is comfortably inside both limits: well under the Rs 100 crore ceiling, and well inside the 91-day cap.

Had the scheme instead placed Rs 120 crore in such a deposit, that alone would breach the 20%-of-net-assets cap, even with a short tenor. And a deposit of Rs 60 crore left for 120 days would breach the 91-day limit, even though the amount was well within 20% of net assets. Both conditions must hold at once — meeting one does not excuse failing the other.

Chapter 5, in the box on "Assets and Liabilities in a Mutual Fund Portfolio" (page 58), right after the workbook sets out net assets and NAV. Expect the two figures to be tested together — 20% of net assets and 91 days — and a question checking whether the candidate treats them as one combined limit rather than two independent ones.

• Both limits apply together. A deposit fine on percentage but too long, or fine on tenor but too large, still breaches the rule.
• The purpose is narrow: only to meet redemptions or pay dividends — not routine cash management.
• This is not the scheme's own money-market holdings. A liquid or money-market scheme invests in such instruments by mandate; this rule is a capped, purpose-specific exception for any scheme that is not.