Mumbai: For the third month in a row, mutual funds increased their assets under management (AUM) as banks parked their surplus money in so-called liquid and liquid-plus funds, with rates in the interbank market—where banks borrow from one another— falling to as low as 4.2%.
For January, AUM increased 11.38% to Rs4.6 trillion from Rs4.13 trillion at the end of December, according to data from the Association of Mutual Funds in India (Amfi), the industry body.
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This is still far from the high of Rs5.95 trillion that mutual funds had under management at end-April 2008. AUM levels declined sharply in a year the Bombay Stock Exchange’s benchmark Sensex fell 52%, its worst drop on record.
Outflows in 2008 were also largely on account of about Rs90,000 crore being redeemed by investors from liquid and income funds between September and October, following the liquidity crisis in the aftermath of the collapse of US investment bank Lehman Brothers Holdings Inc.
AUM is calculated as the sum of net mark-to-market gains or losses posted by funds plus fresh net investment inflows. Mark-to-market is an accounting practice that values securities based on their prevailing market price.
A break-up of the categories of funds that garnered fresh investments in January and those that saw redemptions will be available on Amfi’s website only by the second week of February, but treasury heads and distributors that Mint spoke with said that liquid and liquid-plus funds had contributed to the overall gain in AUM.
Liquid and liquid-plus schemes, which are a subset of the broader debt funds category, are—as their names suggest—extremely liquid in nature, and an investor can get in and out of them at will. They are used largely by banks and corporate treasuries to park surpluses.
“With call money rates having come down drastically, banks have been parking excess funds in liquid and liquid-plus schemes,” said the head of a large financial products distribution house, which also sells mutual funds. He didn’t want to be named.
Call money rate is the rate at which banks raise overnight money to meet their short-term asset-liability mismatches. This rate zoomed to 21% in October when the market was hit by a liquidity crunch.
But the Reserve Bank of India’s (RBI) monetary intervention since then has released at least Rs3.2 trillion into the system, making it largely unnecessary for banks to raise funds through the call money market. As a result, call money rates have come down to 4.2-4.25%.
“It’s a very clear possibility that banks have parked in liquid and liquid-plus funds, but we haven’t,” said Partha Mukherjee, head of treasury at Axis Bank Ltd.
“Banks have started going back to the liquid funds, which act as temporary parking slots till other asset creation opportunities arise,” said Mohan Shenoy, treasurer at Kotak Mahindra Bank Ltd.
Other categories of debt funds are income funds, which primarily invest in government bonds and corporate debt, and gilt funds, which invest in government bonds. These two categories had led to moderate gains in AUM over November and December.
With RBI dropping its repo rate—which it uses to inject liquidity into the system—to 6.5% as of end December from 9% in October, the yield on government and corporate bonds fell, thus boosting their price and the net asset value of such schemes. Bond prices and yields have an inverse relationship. RBI later cut its repo rate further to 5.5%.
Returns from gilt and income funds, however, fell in January, and did not attract many fresh investors. One-month returns on income funds declined 3.04% as on 2 February, and on gilt funds by 7.81%, according to data from mutual-fund tracking firm Value Research India Pvt. Ltd. These funds had performed exceptionally well in the preceding two months.
Graphics by Sandeep Bhatnagar / Mint