Tuesday, March 24, 2009

MFs shift assets to short-term papers to meet redemptions

Over the last couple of months, a lot of debt mutual funds have shifted their assets into short-term money market instruments. The reason: they want to be ready to meet redemption pressures in the last quarter of this financial year.
As a result, their investments in collateralised lending and borrowing obligations (CBLOs) have risen from Rs 4,500 crore as of December to Rs 19,000 crore by February-end.
CBLOs are short-term (overnight to 90 days) securities where the borrower returns the money on a pre-decided future date or time. This is an instrument issued by the Clearing Corporation of India. Mutual funds usually invest in CBLOs that have an overnight tenure, or up to a fortnight.
The yields on these instruments are around 3.5 per cent per annum. Although other money market instruments, like certificates of deposit (CDs), earn higher returns at 7-8 per cent, they are of a longer tenure. CDs and commercial papers (CPs) form the largest portion of liquid funds’ and fixed maturity plans’ portfolios, but fears of a sudden redemption pressure are mostly mitigated by short-term instruments like CBLOs and repos, especially towards the close of a financial year.
“Usually, fund houses face redemption pressures in the January-March period. To meet them, fund managers prefer to park more money in short-term instruments which offer quick liquidity, if required,” said Amandeep Singh Chopra, head (fixed income), UTI Mutual Fund.
Liquid and liquid-plus schemes are the largest investors in CBLOs. The latter’s nomenclature has been changed from the month of February, according to recent Sebi guidelines. The industry has witnessed a rise of 25-30 per cent in incremental money flowing into CBLOs under liquid schemes.

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