RBI ceiling to further erode MFs' asset base

RBI's capping of banks' investments in liquid schemes of mutual funds is going to further reduce the declining assets under management of the mutual fund industry, say fund analysts.

The industry AUM fell to Rs 5.9 lakh crore in March from Rs 7 lakh crore in February. Liquid funds as of March constituted approximately 12 per cent of the AUM of the industry. The assets under management (AUM) of the liquid funds stood at Rs 73,666 crore.

“The coming quarters will see a further drop in AUM as the RBI has given banks six months to withdraw the excess funds,” said Mr Surajit Misra, Executive Vice-President and National Head-Mutual Funds at Bajaj Capital. “However, the industry can self-sustain as these schemes added very little to the bottom line of the fund houses.”

Liquid schemes have high tax benefits and invest in money market instruments such as Certificates of Deposits (CDs), Commercial Paper (CP) and Treasury Bills. They have a restriction of 10 per cent or less mark-to-market component which indicates lower interest rate risk.

“Because of the low mark-to-market risk of these schemes, most money from banks came into liquid funds,” said Mr Ramanathan K., Chief Investment Officer, ING Investment Management. “With this move by the RBI, the pie that banks could invest in will be reduced. To that extent AUMs will fall as there will be redemptions. However, there will not be any systemic issues.”

The cap on investments by banks in liquid schemes of mutual funds has been fixed at 10 per cent of the net worth of the bank. Banks that have more than 10 per cent exposure has been given six months for compliance.

Typically, banks park the excess liquidity in liquid schemes of the debt-oriented mutual funds. These liquid schemes then invest in CDs and CPs; the money finds its way back to the banks.

The RBI has for a long time been uncomfortable with this situation, said a fund house official.

While fund houses did not expect this move, they were aware of the central bank's apprehensions regarding the issue. “The RBI has been uncomfortable with the fact that at a time when there was a clamour for credit growth, banks' money was being parked with mutual funds,” said a fund house official.

Liquid funds were introduced as funds aimed at providing liquid access to retail investors. However, over a period of time liquid funds became popular amongst corporations and institutions looking to seek tax arbitrage. As this helped increase the fund houses' assets under management, fund houses shifted their focus from the retail segment to corporations and institutions in the liquid scheme category. This move by RBI will then see the fund houses going back to their original objective for liquid funds — providing liquid access to retail investors, say fund analysts.

“This move will see the mutual fund industry looking for increased participation from the retail and high net-worth investors,” said Mr Mahhendra Kumar Jajoo, Chief Investment Officer-Fixed Income, Pramerica Asset Managers. “On the other hand, banks can also increase their investments in short-term or ultra short-term debt funds where there is no cap on investments.”

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