Mumbai: Money market mutual funds returns are set to dip, as a new risk control rule restricts them to lower maturity instruments, taking some sheen off the popular fund category.
The Securities and Exchange Board of India (Sebi) in January introduced the rule restricting investments by liquid or money market funds to papers of maturity of up to 182 days from 1 February and 91 days from 1 May as compared with one year before.
While a cut in maturity will reduce interest rate risks, it will widen the return differential between liquid funds and other short-term bond funds, hurting money market funds appeal among corporate and institutional investors, their main clients.
“Liquid funds returns as a category average will gradually fall,” Bekxy Kuriakose, head of fixed income at DBS Cholamandalam Asset Management, said.
“We are already seeing a shift in preference from liquid to ultra short-term funds. This may continue,” Kuriakose said.
Moderation in return will start showing in about a month or two as funds adjust portfolios to relatively lower yielding, shorter maturity papers, fund managers said.
“At present, liquid funds are giving annualised return of around 5%. This may drop to 4% going forward as the rates for three month CD/CPs (certificate of deposit/commercial paper) is around 3% to 4%,” Kuriakose added.
Money market funds, favoured by corporates to park surplus cash, managed Rs1.4 trillion, or nearly a fourth of Indian fund industry’s assets under management at the end of April, according to data from the Association of Mutual Funds in India.
However, the assets remain volatile with billions of rupees flowing in and out of such funds every month.
One such surge when cash-starved corporates pulled out more than Rs900 billion from debt funds contributed to a liquidity crisis in September-October, forcing the central bank to offer money through a special money market operation.
This also led to an unexpected negative one day returns from liquid or liquid plus funds from Mirae Asset, Franklin Templeton, DSP BlackRock and Kotak in October, forcing the regulator to step in with the new rule.
Now, ”their safety will be much higher. We will not see the repeat of a situation like September-October. But it will come at the expense of returns,” said Mahhendra Jajoo, who manages about Rs160 billion as head of fixed income for Tata Asset Management.
Jajoo expects the returns differential between liquid funds and short-term bond funds to widen to 150 basis points in the next two months from 50 basis points now, making some institutional investors look away.
However, the category will still attract a lot of money given the safety it offers, he added.