MFs brace for more outflows from debt schemes

After the Reserve Bank of India (RBI) on Tuesday announced more liquidity-tightening measures to contain excessive speculation in the rupee, mutual funds are bracing for a fresh round of redemptions from fixed income schemes. While yields on long-term securities would rise, the advance is likely to be moderate compared to that for short-term papers. Mutual fund officials expect outflows from most debt schemes, especially dynamic ones, a category that has seen sizeable inflows in the last few months.

This is the second time in the last two weeks that mutual funds would face redemption pressures on their debt schemes. Last week, RBI had tightened short-term liquidity to curb volatility in the rupee. This led to investors, primarily banks and companies, pulling out Rs 60,000-70,000 crore from debt schemes.

"RBI's latest move will once again impact debt schemes, as yields are likely to spike once again, and there could be redemption pressure. Also, last week's move was looked at as one-off; but this would definitely shake investor confidence," said a senior official at a leading fund house.

Short-term rates could rise by as much as 100 basis points, while yields on government bonds could increase 30-40 basis points. "Such moves would result in investors incurring steep losses. Investors could suffer a loss of two-four per cent on Wednesday, depending on the investment," said the chief executive of a mutual fund. Last Tuesday, mutual funds recorded one of their highest single-day outflows since October 2008, when Lehman Brothers was shut. However, mutual funds had escaped relatively unscathed, as they had marked the entire portfolio to the market.

RBI's special liquidity window has also helped the industry, with many mutual funds tapping the facility. The central bank's three-day repo window allows banks to borrow a total of Rs 25,000 crore for mutual funds at 10.25 per cent.

"There is not much money in the system, as banks haven't still recovered from last week's shocker. So, we do not expect banks to withdraw too much," said the head of a mutual fund house