MANY companies have perfected the art of making a quick, cool return from mutual funds (MFs) without investing anything. They do this by playing around with the cut-off timings set by fund houses for accepting cheques from investors.

It works like this: companies and some high networth investors give cheques to buy units of "liquid-plus" MF schemes just before the weekend, when there's no money lying in their current accounts. They enjoy a free return for two days, fund their accounts on Monday morning, stay invested for a few more days and then switch to a new scheme to play the game all over again.

For mutual funds, it's like offering the net asset value (NAV) of the scheme to the investor without receiving any money from it. It's similar to a bank paying interest on a non-existent deposit. Fund houses know the game, but are unwilling to spoil their relationship with big investors.

Here is a typical sequence of events:

Friday, 2.30pm: A corporate gives a cheque to invest in a 'liquidplus' MF scheme. At that point, there's no money in the company's bank account.

Saturday: The investor gets Friday's closing NAV (NAV roughly indicates the price of a mutual fund unit).

Sunday: Investor gets Saturday's NAV which includes the accrued interest. The scheme invests in fixed income securities which carry a fixed interest coupon. This is also why the NAV of such schemes inch up over the weekend.

MONDAY: The corporate investor funds its bank account so that when the MF presents the cheque, it gets honoured. Remember, the MF cannot deposit the cheque before Monday since highvalue cheques are not cleared on Saturdays.

Tuesday & Wednesday:

The company stays invested in the liquid-plus scheme.

Thursday, 2:30 pm: The investor directs the MF to switch the investment from liquidplus to a liquid scheme. (A liquid scheme invests only in securities with less than one year maturity while a liquid plus has papers of more than one year as well).

Friday: The company gives a redemption order for the liquid scheme units, and almost simultaneously, gives another cheque for making a fresh investment in a liquidplus scheme. Again, there's no money in its account.

Saturday, Sunday: Enjoys free NAV.

Monday: The money from the redemption order gets credited to the company's bank account. This money also helps in honouring the cheque that was given on Friday for investing in the liquid plus scheme.

So, in the 11-day cycle, these investors enjoy a free NAV for four days. Their gains may vanish if there is a sudden decision like an interest rate hike, but otherwise, they can rotate the money week after week.

What makes all this possible is the different cut-off timing rules. For instance, in a liquid fund, the investor can get the same day's NAV only if the money is available for utilisation on the same day. But, not so for liquidplus schemes.

Here, the investor can give the cheque by 3 pm and get the same day's NAV even if the MF cannot readily use the money.

This is a game where other investors may end up subsidising these smarter players while the fund house may end up investing in more high-risk securities to generate that extra return.

According to a senior official with a large fund house, since most MFs are under pressure from their managements to grow their assets under management (AUM), they have no choice.

"Besides, the rules allow it. As long as an investor in a liquid-plus scheme gives the cheque before 3 pm, the fund has to give the same day's NAV. If the investor insists, it becomes difficult for the fund to say no," said the CEO of another asset management company.

Two years ago, Sebi had changed the cut-off timings for acceptance of investment by MFs. The guidelines had helped to plug quite a few loopholes. However, even under a stricter regime, clever investors have found a way to get around the rules. "If a corporate finds that it will have a treasury surplus on Monday, it can benefit by placing a liquid-plus order on Friday afternoon. This is becoming an accepted practice and some of the big corporates are doing it," said a bond market dealer.