The Hindu Business Line : Corporates park surpluses in short-term liquid funds

TURBULENT markets and expectations of hardening interest rates are forcing corporates to move funds into short-term liquid funds. Liquid and floating rate funds have been receiving higher inflows with the trend strengthening over the last two weeks.

The mutual fund industry expects this to maintain momentum till the post-budget trends are visible.

According to Mr Deepak Mundra, Deputy General Manager, Finance, Grasim Industries Ltd, all incremental cash flow in the last month has gone into liquid funds. About Rs 1,000 crore to Rs 1,500 crore from the top 100 corporates would have gone into liquid funds over the last month with the impending rise in interest rates. Liquid funds are typically most shielded from hardening interest rate than others.

Liquid funds have been posting average returns of 4.5 per cent for the last 12 months. Returns from floating rate funds are 0.20 per cent to 0.25 per cent over this. Income funds, from where a lot of corporate funds are moving out, have posted nearly zero per cent return during the corresponding period.

Income funds have also dropped to 42 per cent of the assets under management of the mutual fund industry in May 2004.

The risk of return erosion is low in liquid and cash funds. Corporates who entered the market earlier are booking profits on income funds and parking this money in liquid and floating funds. "The average maturity of liquid funds is currently 51 days," said Mr K. Ramnathan, Fund Manager, Birla Sun Life Asset Management Company.

Oil companies such as BPCL are also looking at Mumbai Inter Bank Offered Rate (MIBOR)-linked deposits, which banks offer with returns of around 4.5 per cent. Mr S.K. Joshi, Executive Director, Corporate Treasury, BPCL said, "With all the markets-equity, debt and forex turning turbulent corporates like us are putting money in MIBOR-linked deposits and liquid funds."

BPCL like most oil companies, which have a surplus of Rs 50 crore on one day and a borrowing requirement of Rs 150 crore on another day, are planning to test the waters with the comparatively new money market lending and borrowing platform, Collateralised Borrowing and Lending Obligation (CBLO).

Mr Naval Bir Kumar, Managing Director, Standard Chartered Mutual Fund, said that actively managed liquid funds have posted high returns and corporates are using this vehicle to maximise their returns at minimal risk exposures.

The concerns in the market are the rising domestic inflation figures towards the 6 per cent mark. The high global oil prices, violence in West Asia and impending rise of the US interest rates are not helping. Corporate treasurers are waiting for the budget to assess market triggers and are especially interested in how the Finance Minister is planning to raise resources for his ambitious social initiatives.

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