State Bank of India's offer of 8.5 per cent interest on fixed deposits of Rs 1 crore and above would wean away 20-25 per cent of the assets under management of liquid and money market mutual funds, say experts.

SBI's proposition, announced on Monday, has made all entities in the fund industry wary.

The liquid and money market mutual fund category amounts to Rs 1,62,553 crore or 24 per cent of the mutual fund (MF) industry's assets under management (AUM) of Rs 6,95,437 crore as on October 31, 2011.

The SBI offer specifies a tenor from seven to 180 days with no withdrawal penalty after seven days. The product is targeted at individuals, companies, trusts, associations and societies.

“It will have a direct impact on liquid plus and short-term income funds,” said a VP-MF distribution of an Indian brokerage.

Though the impact of this product is yet to be felt by the MF industry, those in the trade said that this product addressed one lacuna always associated with a fixed deposit — penalty on withdrawal. “The fact that a bank is offering this product as well as the enhanced ease of transacting with a bank rather than a MF when an investor wants to redeem will make this product more sought after,” said a Head of Sales of a national distributor of MFs.

Experts said that a lot of savvy investors would be tempted by the SBI offer and would also forego some returns in return for the safety that the bank offers, though they may not say this openly.

“Though there won't be full migration from MFs to SBI, high net-worth (HNI) investors will certainly start negotiating for higher returns with fund houses,” said a mutual fund analyst. “It has the potential to be a game-changer if SBI persists with the offering; and the impact will be visible by the end of the next quarter.”

Fund House CEOs were less worried.

“This is not the first time that we are facing such a situation. We faced such situations twice earlier — in 1998 and in early 2000-2001 — when there were liquidity concerns,” said a CEO of a mutual fund.

“We have bigger challenges such as banks bringing down their investments in MFs to 10 per cent of their book by January.”

CEOs perceived that this could trigger a rate war for short-term liquidity among banks.

There was also a perception that SBI's offering was more towards HNIs and not-for-profit organisations, whereas liquid funds were mainly subscribed to by small and medium enterprises. As liquid fund dividend pay outs are exempted, there would not be any significant impact. “We also have our relationships in place and people take some time to react to novelties such as these,” said a CEO of another mutual fund.

“And when the liquid fund category is performing well on a post-tax return basis, why would someone upset the apple cart?” he asked.

Banks do not subscribe easily to debt instruments floated by a corporation, (especially an SME) citing credit rating issues. The jury is still out on how much liquid funds, as a category, would be hit.

> raghavendrarao@thehindu.co.in

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