The mutual fund industry is shoring up liquidity to meet the rising redemption expected in debt-oriented schemes even as the crisis kicked off by the IL&FS default is still unwinding in the market.

The crisis started by IL&FS aggravated on Monday after it defaulted interest payment again on commercial paper (CP). Without quantifying the default amount, IL&FS said it will not be able to access the CP market for up to six months from the date of repayment of this obligation. Earlier this month, the IL&FS group defaulted on a short-term loan of ₹1,000 crore from the Small Industries Development Bank of India (Sidbi), while a subsidiary has also defaulted on ₹500 crore dues to the development finance institution.

The mutual fund industry manages ₹13.73 lakh crore of fixed income assets. Of this, ₹1.59 lakh crore is invested in CPs issued by housing finance companies, while ₹72,582 crore is parked with NBFCs.

In the last few days, the debt schemes have registered an outflow of ₹52,000 crore, according to CAMS data which covers 84 per cent of industry flows.

Sporadic redemption

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mutual Fund, said the industry is facing sporadic redemption in debt funds but it has not reached a crisis level.

The RBI has to shore up liquidity for overcoming the current situation. Though it has announced bond purchase of ₹10,000 crore, the fine-print is not known, she said.

Iyer said retail investors should keep away from the noise and stay invested while people who were sitting on the fence can now stagger their investments to take advantage of the current situation. In fact, she added, the fund house has seen positive inflows in the last few days.

Though corporate houses, which are largest investors in debt funds, redeem during the end of every quarter to pay advance tax and other liabilities, panic redemption by retail investors cannot be completely ruled out, said the CEO of a top mutual fund house.

The IL&FS group has term loans of ₹55,900 crore, debentures of ₹24,300 crore and CPs of ₹58,000 crore. On September 13, IL&FS defaulted on ₹1,000 crore loan of Sidbi and on the very next day, it defaulted on ₹105 crore worth CPs.

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