Mutual funds cheer as money comes back into debt4 min read . Updated: 19 Dec 2010, 11:54 PM IST
Mutual funds cheer as money comes back into debt
Mutual funds cheer as money comes back into debt
Mutual fund companies are seeing significant investments in fixed-income schemes, offering them a reason to cheer after months of more redemptions than sales and a continuous decline in the number of investor folios.
Mutual funds buy short-term certificates of deposit, or CDs, from banks for their fixed maturity plans (FMPs) and other fixed-income schemes, and with banks offering at least 9% on these instruments, investors are scrambling to invest in the debt schemes. Interest in monthly income plans (MIPs), too, has increased.
A fortnight ago, banks began offering high rates on CDs to raise money because the banking system is facing a liquidity crunch. Banks can borrow from the Reserve Bank of India (RBI) at 6.25% daily, but they need to offer government bonds as collateral, and all of them do not have enough bonds to offer as collateral. The central bank requires banks to invest at least 24% of their deposits in government bonds, but has relaxed this by a percentage point given liquidity concerns.
The chief marketing officer of one of the country’s top five fund houses admits that investments by funds in CDs have increased. The fund’s own fixed-income funds used to invest ₹ 700-800 crore in CDs every month, and this has gone up to ₹ 2,000 crore in the past two weeks, added the manager, who did not want to be named.
Banks use CDs to raise bulk deposits from the market. The maturity of these instruments ranges from seven days to three years; the bank pays a specified interest rate to the investors. Funds invested in CDs are locked until maturity.
FMPs are close-ended debt-oriented fixed income schemes. Fund managers invest the money under such schemes in fixed-return instruments, including CDs, commercial papers, gilts and debentures, which mature at the end of the term of the FMP. FMPs come in maturities ranging from 90 days to three years.
MIPs are hybrid instruments that put 75-95% of the invested amount in debt and money market instruments such as CDs and the rest in equities.
“The risk-reward (equation) is in favour of investors (right now)," said A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd, which managed assets worth ₹ 67,421.34 crore at the end of September. “We are recommending to investors that it will be worthwhile committing money to short-term oriented funds as rates are attractive. These rates may or may not last.
He added that his firm is continuously rolling out FMPs. “There is a lot of interest in the six months to one year kind of duration. In the last two weeks alone we must have raised around ₹ 3,000 crore (by selling units in such schemes)," he said.
The industry, he added, would have sold units worth around ₹ 20,000 crore under these schemes after CD rates were increased.
The chief marketing officer mentioned in the first instance added that retail participation in one-year FMPs has increased, with his firm receiving, in one case, around 10,000 applications from retail investors for a one-year FMP, as compared to an average of 150 for such schemes before CD rates were raised.
“Many retail investors are now aware that these FMPs can actually fetch more tax-friendly returns than bank deposits," the executive said.
“There is a renewed interest among retail investors in new fixed-income funds, including FMPs," said Srinivas Jain, chief marketing officer at SBI Mutual Fund.
“The spread between CD rates and bank deposits is very attractive," said the fixed-income head of one of the oldest fund houses in India, asking not to be named. “This month we have invested at least ₹ 4,500 crore in CDs so far. Last month, the investment was just half, when CD yields were not so much."
Banks are offering these rates on CDs because of sluggish growth. While bank credit has recorded a 23% year-on-year growth at ₹ 6.72 trillion, deposits have grown by just 15% at ₹ 6.29 trillion.
India’s mutual fund industry has been struggling since August 2009, when the capital market regulator, Securities and Exchange Board of India (Sebi), abolished entry loads, or the charge paid by the investor and routed to the distributor as commission. The industry’s assets have come down from ₹ 7.5 trillion at the end of August 2009 to ₹ 6.65 trillion at the end of November. Debt schemes haven’t been hurt as much as equity ones, but the former rarely see retail participation.
That has since changed. “Retail participation has gone up in the one year-plus FMP segment," said Lakshmi Iyer, head, fixed income and products, Kotak Mahindra Asset Management Co. Ltd, which managed assets worth ₹ 28,429.82 crore at the end of September.
“Retail FMPs are one of the best categories of debt products for retail investors. We have added nearly 2.5 lakh retail investors in our MIPs and pure retail debt schemes in the past one year. Higher rates on CDs have certainly acted as a trigger for more retail participation in debt schemes," said Sundeep Sikka, chief executive officer, Reliance Capital Asset Management Ltd, which is India’s largest fund house with assets worth ₹ 1.07 trillion at the end of September.
A number of new FMPs have been launched by the industry after the new rates on CDs came in. “This is a sharp contrast to two years ago, when FMPs were practically dead," Balasubramanian said.
FMPs were hit by a number of regulatory changes, including a Sebi ban on giving indicative yields. In terms of returns, too, they were mostly on par with liquid funds.
“Dynamically managed bond funds, gilt funds are other categories are seeing good investor interest," Balasubramanian added.
Nearly 70% of the industry’s assets are in debt-oriented schemes.
The liquidity crunch in the banking system may remain at least until March, said Devendra Nevgi, founder and principal partner, Delta Global Partners, an independent research firm.