The Hindu Business Line : Mutual funds feel interest rate tremors

MUTUAL fund houses are feeling the pinch of the rising interest rates with money moving out of fund houses to more lucrative bank deposits and for credit repayments.

The Association of Mutual Funds in India reported total assets under management (AUM) of Rs 1,47,995 crore for October. This is the first time in over seven months that the AUM of the industry has dipped below Rs 1,50,000 crore. Even during May and June, when the markets were depressed post the May 17 crash, fund houses had aggregated AUMs of over Rs 1,54,000 crore.

AMCs claim that most redemptions are in liquid funds. "Banking money is moving out as the repo rates have gone up. It is more lucrative for banks to lend out this money than to park it in liquid funds," said Mr Ved Prakash Chaturvedi, Chief Executive Officer, Tata Asset Management.

Corporates have also begun to redeem some of their treasury investments in mutual funds to utilise these for new projects and other capital expenditure.

The vicious combination of increased borrowing rates coupled with poor performance reported by most debt funds spell further bad news for the mutual fund industry.

With deposit rates also displaying the northward trend, corporate treasury managers may move surplus funds into bank deposits rather than leaving them with fund houses. In the last six months, floating rate funds, the best performing debt category, have posted average returns of 2.26 per cent. The best performing floating rate fund has reported a return of 2.51 per cent. In comparison, several banks now offer deposit rates of five per cent for 181-day deposits and 4.5 per cent for 91-180 days.

Medium term debt funds have posted negative returns of 1.69 per cent for the last six months and medium term institutional funds have reported - 2.12 per cent returns.

"Rising interest rates are always a concern. When interest rates were moving downwards, our returns were good and it was easier to attract new investors and retain existing ones. However, new investors are still coming in and we are still in a growth phase. Funds continue to be attractive options," said Mr Naval Bir Kumar, MD, Standard Chartered MF.

While fund houses are brushing away the sudden dip in their corpuses as aberrations because of the high level of subscriptions to the NTPC IPO and the need for liquidity for the festival season, they are worried about the implications of the rising interest rates in the months following. Several fund houses are realigning their strategy and focusing on retail investors and equity funds, to tide over this storm.

"Our focus in the last month and for the coming few months would be in expanding our geographical base of retail investors," said Mr Chaturvedi. That is the way the market is moving, he added.

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