Paying with your MF? Here's all you need to know about UPI's ‘Pay with Mutual Fund’ feature

Mutual funds introduce payment facility through UPI

Now, investor can use their mutual funds to make payments through Unified Payments Interface (UPI). The recently launched "Pay with Mutual Fund" feature allows investors to make UPI payments from their liquid fund holdings by instantly redeeming the required amount of units.

If you hold a liquid mutual fund and the issuer supports this service, the payment amount is sourced from your holdings with the redemption on the back-end and the funds flowing out almost immediately through Unified Payments Interface (UPI). ICICI Prudential Mutual Fund and Bajaj Finserv AMC, for instant, have launched the feature in partnership with Curie Money.

The feature converts liquid mutual fund into a kind of a bank account but with the potential upside of market-linked returns and integrated UPI payments.

Why this feature is attractive?

Instant liquidity: Liquid funds by design invest in short‐term money market instruments, offering high liquidity and are often used to park short-term cash. The feature allows investors to make payments directly without first redeeming and moving money into bank account.

Potentially better returns than a savings account: Savings bank accounts offer very low interest rates, often less than 4 percent in India. Liquid funds may generate higher returns, depending on interest rate environment and fund expense ratio while still offering relative stability. Currently, liquid funds are giving returns of up to 7 percent.

Convenience of UPI payments: Many of us already use UPI for daily payments. Integrating a liquid fund as the source makes it easy to access parked money for payments without switching apps, or requesting transfer to a bank account first.

Flexible cash management: For individuals and businesses alike, this feature allows managing short-term funds more dynamically keeping them invested in a liquid fund rather than idle in a bank account, and using them when needed.

Is it better than a savings Account?

In many cases yes but with caveats. A savings account is ultra-liquid, safe (deposits insured up to Rs 5 lakh), and has very predictable returns. A liquid fund may offer higher returns but comes with higher risk.

If you are parking money for very short term and want zero risk, a savings account may still have the edge in absolute safety. But if you are comfortable with a low-risk mutual fund and would like to earn something extra while retaining access, the instant redemption feature could be better. The key is making sure you trust the fund’s liquidity and the redemption plus payment process works flawlessly.

Things to keep in mind

Check the fund’s average returns: The net return you get after costs matters. Also, understand the redemption timing and settlement process. Even “instant” features may have cut-off times, processing lags, or limitations on amounts.

Taxation: “Frequent redemptions can trigger multiple short-term capital gains calculations. Since debt mutual funds are now taxed at an investor’s marginal tax rate, those in the 30% bracket or above could see a higher effective tax outgo,” said Lt Col Rochak Bakshi, Founder of True North Finance, a financial and investment planning firm.

Maintain discipline in liquid funds: Anuj Kesarwani, Founder of Zenith Finserve, notes that a potential drawback is that it may test investors' discipline to remain invested in liquid funds, which are typically used for emergency funding. However, do not treat it as a substitute for emergency funds entirely. While liquid funds are very liquid, it is always better to follow the diversification rule and keep some portion in a conventional savings account.

If you opt for this feature, monitor your investment horizon and liquidity needs and maintain clarity about what portion of your parked cash is used for payments vs for longer-term investment.

In summary, the instant redemption facility represents a smart evolution in how liquid funds can be used offering the dual benefits of convenience and enhanced returns relative to a standard savings account.

For many investors who keep short-term funds idle in bank accounts, it could be a valuable option provided they understand the process and risks.