The Reserve Bank of India restricted banks investment in liquid and short term schemes of mutual funds (MF). The RBI has announced that the banks can invest up to 10% of the last year’s net, as according to the liquid or short term debt schemes of MF, but they should not exceed the time span by a year.

The RBI stated that the banks which have invested more than the 10% profit in such schemes will not be permitted to fulfill the condition at this point of time, but they have to do it within six months from the date of announcement.

This decision of RBI can bring a negative effect to the Assets Under Management (AUM) of fund houses which majorly depends on the money flows from banks.

The liquid fund schemes which have been given 90-day maturity time can handle around about Rs 1 lakh crore of banks' funds. With the RBI’s announcement, it will take out around Rs 50,000 crore to Rs 60,000 crore from the fund trading. This trading will have an adverse effect on the AUM, as these fund houses do not earn much from liquid funds.

"The liquid schemes continue to rely heavily on institutional investors such as commercial banks whose redemption requirements are likely to be large and simultaneous”, the RBI stated. Therefore, there is a risk in the trading of mutual funds.