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The spectacular run in mutual fund inflows seems to be tapering off. In its recent Financial Stability Report, the Reserve Bank of India has raised concern over the volatility in mutual fund inflows due to certain market developments.
The net inflow into mutual fund schemes in the first half of this fiscal was down sharply at ₹45,800 crore, against ₹2.02 lakh crore logged in the same period last year.
Notwithstanding the ebbs and flows in aggregate mobilisation of mutual funds, the systematic investment plans remained a favourite with investors. The net folio increase during April-September 2018 over 2017-18 was 2.88 million.
Growth in the number of SIPs appears to be relatively more stable from the point of view of sustainability of fund inflows.
Given the significant churn in inflows in mutual funds, management of liquidity by MFs has become important, said the RBI report.
Mutual funds are redeemable on daily basis, which, under normal circumstances see orderly redemptions. However, under stressed market conditions, a fund must be ready to meet the redemption obligations to its unit-holders.
Provision for redemption
In this context, liquidity management is very important for mutual funds and there must be adequate policies and procedures to meet investor redemption requests. SEBI has already put in place various policy tools to mitigate and resolve liquidity issues in mutual fund schemes including a provision to pay redemption proceeds 10 days after receiving requests from investors.
To evaluate potential vulnerabilities, SEBI has made stress-testing mandatory for all liquid and money market mutual fund schemes. The stress test is required to be carried out on a monthly basis and should test the impact of interest rate risk, credit risk and liquidity and redemption risk on the NAV of the concerned schemes.
To limit investments in illiquid assets, aggregate value of any scheme’s investments in ‘illiquid securities’ should not exceed 15 per cent of the total assets of the scheme and any illiquid securities held above 15 per cent of the total assets will be assigned zero value.
Mutual funds have also been allowed to borrow to meet temporary liquidity requirements for repurchase, redemption of units or payment of interest or dividend to unit-holders. It can borrow up to 20 per cent of the net assets of the scheme for six months.
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