What Is UPI’s ‘Pay With Mutual Fund’? All You Need To Know About This Feature | Savings and Investments News

UPI’s ‘Pay with Mutual Fund’ is a significant step in modernising how liquid funds can be used.

Investors can now use their mutual fund holdings to make payments directly through the Unified Payments Interface (UPI). The newly launched ‘Pay with Mutual Fund’ feature allows investors to instantly redeem the required amount from their liquid fund holdings to complete UPI payments, making mutual funds more versatile and accessible than ever before.

If you hold a liquid mutual fund and the fund issuer supports this service, the payment amount is sourced directly from your holdings. The redemption happens on the back-end, and the funds flow out almost immediately via UPI. ICICI Prudential Mutual Fund and Bajaj Finserv AMC, for example, have rolled out this feature in partnership with Curie Money. Essentially, it converts your liquid mutual fund into a kind of bank account, but with the potential upside of market-linked returns and seamless UPI payments.

How Does It Work?

Liquid funds invest in short-term money market instruments and are designed to offer high liquidity. Traditionally, investors park short-term cash in these funds for better returns than a bank savings account. With this new feature, you no longer need to first redeem units and transfer money to a bank account, payments happen directly from the fund via UPI.

Benefits of Paying With Mutual Funds

Instant Liquidity: Since liquid funds are inherently highly liquid, the feature allows for direct payments without first moving money to a bank account.

Potentially Better Returns: Savings accounts in India currently offer low interest rates, often under 4%, while liquid funds can generate returns up to 7%, depending on interest rates and fund expenses.

Convenience of UPI Payments: Many people already use UPI for daily transactions. Integrating a liquid fund as a payment source simplifies access to parked money, eliminating extra steps like transferring funds to a bank first.

Flexible Cash Management: This feature enables both individuals and businesses to manage short-term funds more dynamically, keeping them invested rather than idle in a bank account, and using them when needed.

Considerations Before Using This Feature

While this facility offers higher potential returns, there are some caveats. Savings accounts are ultra-liquid, insured up to Rs 5 lakh, and provide predictable returns. Liquid funds, although low-risk, carry a slightly higher risk and are subject to market movements.

Check Fund Performance: Consider the net returns after costs, and understand the redemption process. Even “instant” features may have cut-off times, processing lags, or limits on transaction amounts.

Tax Implications: Returns from liquid funds are taxed like bank deposits or savings accounts, according to your marginal tax rate.

Emergency Funds: This feature should not completely replace a conventional savings account. It is wise to maintain some funds in a bank account for ultra-safe, immediate access.

Liquidity Management: Decide which portion of your parked cash will be used for payments and which will remain invested for short-term or medium-term needs.

UPI’s ‘Pay with Mutual Fund’ is a significant step in modernising how liquid funds can be used. For investors who typically keep short-term cash idle in bank accounts, it provides the dual benefits of convenience and potentially higher returns. As with any financial innovation, the key is understanding the process, trusting the fund’s liquidity, and aligning usage with your risk profile and cash-flow needs.

This feature represents a smart evolution in personal finance, combining instant payment capabilities with the potential of market-linked returns, a win-win for informed investors looking for efficiency and better yields on short-term funds.