Mutual funds will have to grapple with large redeemptions, with banks, which figure among the big-ticket investors, planning to pull out money amid concerns that returns from liquid schemes could dip further. Fund houses think such redemptions could start from August end.
As part of the new rules that followed last year’s money market crisis, the capital market regulator Securities and Exchange Board of India (Sebi) had restricted MFs from investing liquid plan funds in instruments with maturities beyond 90 days. Since the new regulation became effective in June, the return on liquid plans have fallen from 5% annually to 3.5%-4% in the first quarter.
Till now banks often parked their surplus fund in liquid schemes which generated a better return than other comparable short-term instruments. As on June 30, banks had outstanding investments of over Rs 1.20 lakh crore in such schemes. This will change now since most banks feel that the investment restriction will impact MFs ability to generate a better return. “Substantial amount of money being parked in liquid plans is a phenomena that is not going to last for long. Sebi norm will drive banks to find ways to lend more to the manufacturing sector,” said M V Nair, CMD of Union Bank of India. Mr Nair, who is also the chairman of Indian Banks’ Association, said, “We expect credit to pick up in the second half of this year....We are receiving more loan proposals.”
In absence of a loan offtake from corporates, banks are sitting on a huge surplus, a substantial part of which is being placed with the Reserve Bank of India under the central bank’s reverse repo facility. But given a return of 3.5% which the central bank offers, banks find MFs a better option.
Fund houses realise the shift in investments that’s about to happen. “There is a good chance that inflows from banks into liquid funds will start tapering off in the coming months, with returns going down dramatically,” said Ritesh Jain, head of fixed income at Canara Robeco Mutual. According to him, fund houses can do little to improve performance of liquid plans given the strict regulations.
In a move to minimise mismatches and liquidity crunch, Sebi told MFs in May that maturity of securities cannot exceed that of the scheme. While the funds started rejigging their investments from June, the full impact on the scheme returns would be felt only in September by when most of the long dated, high yielding papers would mature.
Mr Jain thinks that while the possible impact on liquid schemes have been factored in, liquid plus plans — the ultra-short term plans — may also face the heat. Allured by returns higher than liquid plans, banks have been shifting to liquid plus schemes. “Now, if they withdraw from these funds, MFs will face a problem during redemption. This is beacuse securities in these schemes are of longer maturity,” he said. Ultra short term plans have more leeway in investing in structured and longer tenure assets which enable them deliver a better return.
As part of the new rules that followed last year’s money market crisis, the capital market regulator Securities and Exchange Board of India (Sebi) had restricted MFs from investing liquid plan funds in instruments with maturities beyond 90 days. Since the new regulation became effective in June, the return on liquid plans have fallen from 5% annually to 3.5%-4% in the first quarter.
Till now banks often parked their surplus fund in liquid schemes which generated a better return than other comparable short-term instruments. As on June 30, banks had outstanding investments of over Rs 1.20 lakh crore in such schemes. This will change now since most banks feel that the investment restriction will impact MFs ability to generate a better return. “Substantial amount of money being parked in liquid plans is a phenomena that is not going to last for long. Sebi norm will drive banks to find ways to lend more to the manufacturing sector,” said M V Nair, CMD of Union Bank of India. Mr Nair, who is also the chairman of Indian Banks’ Association, said, “We expect credit to pick up in the second half of this year....We are receiving more loan proposals.”
In absence of a loan offtake from corporates, banks are sitting on a huge surplus, a substantial part of which is being placed with the Reserve Bank of India under the central bank’s reverse repo facility. But given a return of 3.5% which the central bank offers, banks find MFs a better option.
Fund houses realise the shift in investments that’s about to happen. “There is a good chance that inflows from banks into liquid funds will start tapering off in the coming months, with returns going down dramatically,” said Ritesh Jain, head of fixed income at Canara Robeco Mutual. According to him, fund houses can do little to improve performance of liquid plans given the strict regulations.
In a move to minimise mismatches and liquidity crunch, Sebi told MFs in May that maturity of securities cannot exceed that of the scheme. While the funds started rejigging their investments from June, the full impact on the scheme returns would be felt only in September by when most of the long dated, high yielding papers would mature.
Mr Jain thinks that while the possible impact on liquid schemes have been factored in, liquid plus plans — the ultra-short term plans — may also face the heat. Allured by returns higher than liquid plans, banks have been shifting to liquid plus schemes. “Now, if they withdraw from these funds, MFs will face a problem during redemption. This is beacuse securities in these schemes are of longer maturity,” he said. Ultra short term plans have more leeway in investing in structured and longer tenure assets which enable them deliver a better return.
Source: http://economictimes.indiatimes.com/Market-News/MFs-may-face-large-redemptions/articleshow/4823803.cms
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