Liquidity Mismatch: The Redemption Promise That Was Never About the Assets
An open-ended fund's promise to redeem your money on any business day is a promise about the fund's own operations.
An open-ended fund's promise to redeem your money on any business day is a promise about the fund's own operations. It says nothing about how fast the fund's actual holdings can be sold — and for most of both markets' history, no rule required any minimum liquidity cushion at all. In April 2020, Franklin Templeton froze six Indian debt schemes holding roughly ₹25,000 crore with no liquidity floor in place. In September 2008, the Reserve Primary Fund's NAV fell to $0.97 the same way, twelve years earlier. Both regulators answered in two steps: a liquidity floor first (India's 10%, since November 2020; the US's 10%/30% under Rule 2a-7, since 2010), then a sharper second fix — swing pricing (India, since 2022) and a floating NAV (the US, since 2016) — aimed at the same first-mover dilution problem a floor alone can't close. What a BA modeling redemption risk has to check that a redemption-frequency field alone will never show.
Surya · 10 min read