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Sharvari Patwa

Mumbai, Oct. 14 Reserve Bank of India on Tuesday turned out to be a saviour of sorts for cash hit-mutual funds in the country who are struggling to cope with redemption pressure from corporations.

RBI, in a move to ease the liquidity concerns of mutual funds, has allowed them to raise funds against certificate of deposits (CDs).

CDs are short- or medium-term interest bearing debt instruments of a specific maturity and are issued by banks. Debt schemes — mainly liquid schemes of mutual funds — invest in debt securities of a short-term nature, which generally means securities of less than one-year maturity, and these include certificates of deposits.

The repo facility for 15 days will help banks to onward lend to mutual funds and will save mutual funds from selling securities in the market to fund their liquidity requirements for facing redemptions, said Mr Sujoy Kumar Das, Head of Fixed Income, Bharti Axa Investment Managers.

It is a welcome development for the mutual fund industry, and is a standby arrangement in order to take care of the redemption requirement of mutual funds, said Mr A.P. Kurian, Chairman, Association of Mutual Funds (AMFI).

“This was what the market requires now. Instead of selling securities, the mutual funds can have the option of either selling the CDs or taking a loan against them,” said Mr Kurian.

Mutual funds are extended a credit line by commercial banks but the current liquidity constraints faced by the banking system called for a temporary solution to ensure smooth functioning, said fund managers.

Corporate clients are redeeming their investments to meet fund requirements as the banks are not giving them credit or overdraft facilities.

This is the first time that such a measure has been announced in India, and we are currently looking into the operational details. Some of our peers seem to have benefited from this facility today, said Mr Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments.

There is no requirement from the mutual fund anymore to “fire sell assets in their liquid and liquid-plus schemes and that should ease tensions to a significant degree”, said Mr Rajiv Anand, Head-Investments, IDFC MF.

There have been some outflows from liquid and liquid-plus schemes, he added.

Most mutual funds in dire need of funds have been flocking to banks since Monday to enquire about this. There was some inkling of what was to come, said banking officials.

As a lender of last resort, the RBI has provided a supportive measure to the mutual fund industry, said Mr Kurian.

Liquidity is the one of the key issues in the current scenario and the RBI’s step to alleviate such pressures are being considered as apt, although a temporary solution, for redemption pressures of mutual funds.

Although this move will give a 14-day liquidity window to meet the redemption pressures of mutual funds, this is in no way a permanent solution to resolve the problem of severe lack of liquidity in the financial system, said Mr Devendra Nevgi, CEO and CIO, Quantum Mutual Fund.

Industry officials estimate that close to Rs 1 lakh crore of mutual fund investments are in CDs.

According to the data provided by Value Research, more than 60 per cent of the mutual fund industry’s assets under management are in debt and cash, while 30 per cent is in equity, and the rest in hybrid assets, as on September 30, 2008.

The assets under management in the debt/cash category is around Rs 3,37,434 crore, and in equity is Rs 1,62,503 crore, according to the data provided by Value Research.

More Stories on : Mutual Funds | CRR & Bank Rates

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