Tuesday, May 12, 2009

New rule to hit cash funds gains, assets

India's money market mutual funds returns are set to dip, as a new risk control rule restricts them to lower maturity instruments, taking some sheen off the popular fund category.
India's market regulator in January introduced the rule restricting investments by liquid or money market funds to papers of maturity of up to 182 days from Feb 1 and 91 days from May 1 as compared with one year before.
While a cut in maturity will reduce interest rate risks, it will widen the return differential between liquid funds and other short-term bond funds, hurting money market funds appeal among corporate and institutional investors, their main clients.
"Liquid funds returns as a category average will gradually fall," Bekxy Kuriakose, head of fixed income at DBS Cholamandalam Asset Management, said.
"We are already seeing a shift in preference from liquid to ultra short-term funds. This may continue," Kuriakose said.
Moderation in return will start showing in about a month or two as funds adjust portfolios to relatively lower yielding, shorter maturity papers, fund managers said.
"At present, liquid funds are giving annualised return of around 5 percent. This may drop to 4 percent going forward as the rates for three month CD/CPs (certificate of deposit/commercial paper) is around 3 to 4 percent," Kuriakose added.
Money market funds, favoured by corporates to park surplus cash, managed 1.4 trillion rupees, or nearly a fourth of Indian fund industry's assets under management at the end of April, according to data from the Association of Mutual Funds in India.
However, the assets remain volatile with billions of rupees flowing in and out of such funds every month.
One such surge when cash-starved corporates pulled out more than 900 billion rupees from debt funds contributed to a liquidity crisis in Sept-Oct, forcing the central bank to offer money through a special money market operation.
This also led to an unexpected negative one day returns from liquid or liquid plus funds from Mirae Asset, Franklin Templeton, DSP BlackRock and Kotak in October, forcing the regulator to step in with the the new rule.
Now, "their safety will be much higher. We will not see the repeat of a situation like Sept-Oct. But it will come at the expense of returns," said Mahhendra Jajoo, who manages about 160 billion rupees as head of fixed income for Tata Asset Management.
Jajoo expects the returns differential between liquid funds and short-term bond funds to widen to 150 basis points in the next two months from 50 basis points now, making some institutional investors look away.
However, the category will still attract a lot of money given the safety it offers, he added.

Debt funds spur 42% surge in India fund assets

Assets of Indian mutual funds rose 42.23% to Rs5.9 trillion in April on record inflows in fixed income funds, data from the Association of Mutual Funds in India show.

This contrasts with a record Rs987 billion of outflows in March, that had lead to an 18% fall in the assets under management of the industry.

“There was a reversal in inflows in income and liquid funds after the huge redemptions in March. This is mostly institutional inflows, which have come back into fixed-income funds,” Chintamani Dagade, a senior research analyst with Morningstar India, said.

Fixed income funds collectively mopped up Rs1,545 billion, including Rs1,030.55 billion inflow in income funds, the highest ever since mutual funds data was made available in late 1999.

The inflow also included a record Rs518.52 billion collected by money market funds as banks, flushed with liquidity, parked surplus cash in mutual funds.

Equity funds, however, saw a net outflow of Rs1.1 billion, their highest monthly outflow since December as investors took advantage of a more than 17% rise in India’s benchmark index to book profits.

Source: http://www.livemint.com/2009/05/12110353/Debt-funds-spur-42-surge-in-I.html