Mumbai: Assets under management, or AUM, of Indian mutual funds dipped to the lowest in a year in September, pulled down by the meltdown in stock market and a sudden liquidity crunch that saw firms and banks rushing to asset management companies and redeeming part of their investments to generate funds.
The Sensex, India’s most tracked equity index, fell more than 11% in September to close at 12,860.43 on 30 September.
The liquidity crunch was partly on account of advance tax outflow in September. Indian firms pay corporate tax before the end of every quarter in advance, in accordance with their profit estimates.
According to data released by industry body Association of Mutual Funds of India, assets under management at the end of September stood at Rs5.29 trillion, a fall of 2.7% from a month ago.
Also See Value Erosion (Graphic)
AUM has seen erosion in value in six of the past 12 months but the outstanding assets under management have never dropped to this level since September 2007.
During this time, Rs23,031 crore was mobilized through new equity funds, according to New Delhi-based mutual fund tracker Value Research.
According to Jaideep Bhattacharya, chief marketing officer at UTI Asset Management Co. Ltd, India’s fourth largest fund house that manages Rs49,772 crore, there has been a “huge liquidity issue” and call money rates have shot up because of that. This forced banks to redeem their investments in funds.
“Lots of corporates have also moved their money” to pay advance tax, said Bhattacharya.
The interest rates on overnight interbank call money market touched 16% on 29 September, the highest since April 2007, as banks rushed to borrow from each other to tide over their temporary asset-liability mismatches.
The overnight lending rate continued to spike throughout the month to reach 17.5% on 1 October as an estimated Rs40,000 crore that went into advance tax payments exited the system. The Reserve Bank of India has continuously extended liquidity support to the banks to help them tide over the liquidity crunch.
Banks normally park their funds with short-term liquid funds. As the overnight call money rates rose, they redeemed those funds and lend money at higher rates. Certain liquid funds allow investors entry and exit on a daily basis.
The liquidity crunch and the ensuing financial crisis worldwide has also impacted stock prices, which fell throughout the month, thus affecting AUMs, whose values are marked to market, an accounting practice of valuing a financial asset in accordance with its market price and not at the acquisition cost. In other words, if there is a substantial erosion in market value, AUM can go down even though there is no redemption pressure.
The Sensex fell 36.6% from January through September as foreign institutional investors, or FIIs, pulled out their money from emerging markets to invest in safe havens such as gold and US treasury bills.
After having been net buyers for the past several years, FIIs have pulled out more than $9 billion (Rs42,210 crore) from Indian stocks this year. In September alone, tracking the fall of US investment bank Lehman Brothers Holding Inc. and the bailout of institutions such as Freddie Mac, Fannie Mae and American Investment Group Inc., foreign investors withdrew Rs8,450 crore from the Indian market
Although domestic institutional investors such as life insurers and mutual funds did buy stocks worth Rs9,212 crore in the month, it was not enough to support the Sensex.
“Valuations are attractive...outlook remains uncertain at this time,” said Sandip Sabharwal, chief investment officer (equity) at JM Financial Asset Management Pvt. Ltd, which manages Rs10,446 crore. “Due to lack of clarity on foreign fund flows, it’s difficult to take a call (on market outlook).”
According to fund trackers, people are not investing in mutual funds, especially in equity new fund offers. Investors pumped in about Rs300 crore during June-August through new fund offers in equity schemes compared with more than Rs15,000 crore in December and January at the height of the bull run, according to Value Research.
“Sentiments are not good,” said Bhattacharya of UTI AMC. “I don’t see retail investors putting in lump sums. All equity money is through SIPs.”
SIPs stand for systematic investment plans where investors normally invest a fixed sum on a monthly or quarterly basis. But anecdotal numbers provided by fund houses prove that these SIPs account for only a small portion of net inflows. For instance, Reliance Capital Asset Management Ltd, India’s top fund house that manages Rs86,494 crore, says only 1% of its inflows over the past three years came through SIPs.
“Maybe, this is the beginning for bad times for the mutual funds business,” said Dhirendra Kumar, CEO of Value Research. “When markets don’t do well, people don’t get excited about mutual funds.”
With equity markets losing its sheen, risk averse investors seem to be parking their money in banks. Interest rates on one-year term deposits of banks have gone up to around 10%. Even though it is less than the prevailing inflation rate and the interest earnings are subject to income tax, banks’ deposit portfolio has been swelling. The industry has seen 22.5% growth in deposit mobilization year-on-year. In absolute term, it works out to Rs6.25 trillion, more than the total AUM of the Indian mutual fund industry.