Will the Reserve Bank of India’s (RBI’s) bailout serve as a trigger for more redemptions, or will it bring back a sense of sanity to investors’ psyche?
A bailout package of Rs 20,000 crore through the short-term lending route to help mutual funds (MFs) meet their liquidity needs and overcome redemption pressure may actually send investors scurrying to MFs to redeem their units. The central bank will conduct a special four-day repo at 9 per cent per annum for this bailout sum. The repo rate is the rate at which RBI lends to banks.
Assets (Rs cr)
|Liquid Plus Institutional||53,059.55|
|Liquid Funds institutional||63,473.83|
While fund managers admit that the very fact that RBI and the Securities and Exchange Board of India (Sebi) have acted in concert indicates that the situation is grim, most agree that the only problem is liquidity. “The problem is with liquidity in the market rather than with the mutual fund industry,” said Ashish Nigam, head of fixed income, Religare-Aegon Asset Management.
The average return given by the liquid plus funds in one year is 8.73 per cent, while the liquid plus institutional category has returned 8.89 per cent over the same period. Since RBI is lending funds to banks at the rate of 9 per cent per annum, banks are expected to charge around 11 per cent interest. So, the issue here is that whether funds are in a position to borrow at this rate.
According to market sources, most fund houses have a net worth of Rs 10-20 crore. Only the bigger ones would have a net worth of Rs 50 crore or more. And, passing on the cost of borrowing to the customer will only drive them away.
No wonder, only Rs 3,500 crore worth of credit has been accessed by banks because they are not in a position to borrow.
Further, fund managers are not sure whether the 20 per cent limit applies to funds using this facility. As per Sebi regulations, MFs can borrow up to 20 per cent of their assets under management to meet redemption pressure. “Technically speaking, that cap is applicable only if banks lend outright to mutual funds, but there is no clarity in this case,” said a fund manager.
“The current problem is a result of the mismatch in maturity of assets rather than their quality,” said a fixed-income fund manager. Given that the liquid and liquid plus funds have total assets of over Rs 1.5 lakh crore, which is 29 per cent of the total assets of the industry, any sharp rise in the redemption will hurt the industry.