NSE's overnight investment facility: Will it be useful to you?

It's a good opportunity for investors to utilise their capital efficiently

In a move that will help investors utilise their liquid cash efficiently, the National Stock Exchange (NSE) has introduced an overnight liquid transaction facility on its web-based Mutual Fund platform.

The Bombay Stock Exchange was the first to launch such a facility where investors who had unutilised cash with the broker can invest it in a liquid fund and interest can be earned on it. BSE records a daily transaction of around Rs 400-500 crore.

This is good news not only for investors but also for the money markets as the idle liquidity will be utilised in the system and overnight rates may come down.

Before commenting on the usefulness of the new system, let’s first understand what it means for an investor.

Assuming an investor sells Rs 5 lakh worth of shares with his broker or has some amount lying idle with the broker. As per the rules he can get the money back after two days of the transaction according to the T+2 settlement schedule. Now, if the investor feels that he wants to buy shares if and when prices fall he leaves the money with the broker. This money does not give him any returns.

What both the stock exchanges have done is they have now allowed such investors to park their money in a liquid mutual fund scheme which invests the money on their behalf in the money market and gives them moderate returns for doing so.

Now if next day the investor buys some shares he can send a redemption request and his money will be back in his account before he has to make the payment to the broker. For the investor, this is effective utilisation of cash which will give him at least some returns.

While the scheme prima facie looks good there are certain points to needs to be pointed out. Here are five points to be considered in the exchange’s overnight investment facility.

1. A sizeable number of trading accounts have shifted to online broking where a client’s saving bank’s account is mapped to the broker. Many full service brokers also offer similar facilities. Online brokers, especially banks who also offer broking services have a seamless movement of money between the broking account and savings account. For these clients overnight facility might not be that attractive.

2. NSE, as per its circular says that the participant will have to physically deliver documents at the RTA (registrar transfer agent) or AMC (asset Management Company) from time to time. This can be a dampener for the scheme since generally a client who will be interested in using the overnight facility will be internet savvy and would not like the cumbersome process of going to the RTA/AMC’s office.

3. Some online brokers, especially the discount brokers allow investor to initiate a trade only if there is money in his trading account. By transferring money to the overnight facility might not show a credit in his trading account which might restrict him from initialising a trade.

4. Redemption units, as per the NSE circular is for ‘All’ units. This means that the investor cannot part withdraw his money even if he has to use only part of his cash.

5. Brokers might get more stringent in terms of collection if this scheme picks up among investors. Currently brokers use the ‘netting’ principle while reporting to the exchanges. As per this principle if there is credit in some accounts he would match it with the debit in other accounts and then report the residual debit or credit to the exchange. But assuming if clients get smarter and transfer their unused capital, then the debits would show up in the broker account and he will be pressuring the client to pay up. Certain schemes that brokers use where they allow the client to carry forward their position for a week will be stopped.

But overall, it’s a very good move for the investors to utilise their capital efficiently, which, if nothing else, imparts training of effective capital utilisation.