They enjoy free returns 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. It's akin 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 liquid-plus MF scheme. At this point, there's no money in the company's bank account. Saturday: The investor gets Friday's closing NAV.

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 NAV of such schemes inch up over the weekend.

Monday: The investor funds the bank account so that when the MF presents the cheque, it is honoured.

The MF cannot deposit the cheque before Monday since high-value cheques are not cleared on Saturdays. Tuesday & Wednesday: The company stays invested in the liquid-plus scheme. Thursday, 2.30pm: The investor directs the MF to switch the investment from liquid-plus 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. Almost simultaneously, it gives another cheque for making a fresh investment in a liquid-plus scheme.

Again, there's no money in the company's account. Saturday, Sunday: Enjoys free NAV. Monday: The money from the redemption order gets credited to the company's bank account. The 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, the investor enjoys free NAV for four days. The gains may vanish if there is a sudden decision, like an interest rate hike. Otherwise, the corporate investor 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 liquid-plus schemes. Here, the investor can give the cheque by 3pm 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 the 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 mutual funds 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 3pm, 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 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 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.