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The concentration of risk averse investors in debt mutual funds has narrowed the exit route and created the recent logjam in the industry.
The RBI's Financial Stability Report released on Friday said corporate 'fleet footedness' in terms of exit can be diversified by ensuring that no single investor contributes a disproportionate share of investments to any scheme of an asset management company.
Regulations specify single investor concentration norms for diversifying the investor base. However, when the investor profile is dominated by risk averse investors, as is the case in money market/ debt mutual funds, there is a strong possibility of a few corporates distributing their surplus over four/ five fund houses and blocking exits during times of stress.
The debt fund management industry is extremely competitive and portfolio performance plays an important role in incremental fund flows, said the report. Such behaviour typically masks the illiquidity premium as excess returns.
Although substantial, excess returns turned negative in the wake of Covid-related dislocations. Given the recent churn in debt mutual funds, the risk appetite of the sector and consequent investment allocation assumes importance, said RBI.
Debt at risk
While investments in corporate bonds offer higher returns, the risk premium may not be commensurate with the current elevated risk in the corporate bonds market.
The exposure of debt-oriented mutual fund schemes to corporate bonds rose to 47 per cent of total debt AUM as of March-end, from 42.9 per cent recorded last September. The exposure of debt-oriented mutual funds to downgraded corporate bonds worsened further in the last 6 months. This exposure was 2.37 per cent at the end of last September, but came down to 0.61 per cent in March and further to 0.6 per cent in April.
In the debt segment, MFs’ investments in instruments of maturity of 90 days and less, mostly in commercial paper, has dwindled since last October, and touched a trough in March. However, there was a turnaround in April.
Notwithstanding the recent decline in AUM, mutual funds’ gross receivables were about Rs 7.86 lakh crore (29.5 per cent of their average AUM), whereas their gross payables were about Rs 0.68 lakh crore as of March-end, said the RBI report.
The top recipients of their funding were banks, followed by NBFCs, HFCs and All India Financial Institutions (AIFIs).
Inflows dip
The mutual fund industry’s assets under management fell by 9.2 per cent as of March, over its value at the end of last September. Assets under management of the equity-oriented schemes declined more than debt, said the report.
Mutual funds’ total deployment of Rs 8.98 lakh crore in the equity market as of March was sizeably lower than Rs 11.77 lakh crore logged last October, owing to a fall in the value of equities in the wake of extreme uncertainty due to Covid.
However, market conditions and sentiment improved in April and the equity markets recovered in value to Rs 10.14 lakh crore.