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Namrata Gada

Heavy inflows denting returns

Mumbai June 6 Mutual funds are turning down big-ticket investments into their very short duration schemes (liquid funds) in the face of a surfeit of such funds, say industry sources.

The high inflow of funds has pulled down the returns provided by the `liquid funds' as most mutual funds are already sitting on surplus cash in the absence of avenues of investment. Fresh inflows are only adding to the problem. Mutual funds are in a quandary as acceptance of fresh funds would mean that existing investors are put to a loss, as the available returns will have to be shared among a larger pool of investors.

"Most of the fund houses are sitting on cash because of the huge inflows and the size of the secondary bond market for trading being very small. This has taken the returns from liquid funds down to around 5.5 per cent compared to over 8 per cent previously," said Mr Ritesh Jain, Fund Manager, Debt, Kotak Mahindra Mutual Fund.

Asset management companies are trying to persuade investors to divert these inflows into `liquid plus' or `short-term debt' funds that have slightly longer duration than liquid funds.

Fund houses may not be keen on committing additional monies to the bond market as there is an expectation that the flows in the system could turn negative again in a few days and in any case, there is the possibility of a rate hike, said Mr Sandeep Bagla, Head - Fixed Income, Principal PNB Mutual Fund.

Banks and corporate institutions have in the last fortnight poured in money into these schemes owing to excess liquidity.

Fund managers said banks did not trade directly in the bond market on account of the price risk involved and also due to fear of the future movement of interest rates, which may give negative returns while liquid funds provide positive returns.

"The secondary bond market is very small with trading of around Rs 500 crore daily whereas banks combined had surplus cash in excess of Rs 20,000 crore and hence they do not buy or sell bonds directly in this market," said Mr Ritesh Jain of Kotak MF.

"Also, there is a price risk involved when banks have to trade directly and hence they invest all the money in the open-ended liquid funds where money can be redeemed," he added.

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