Mutual funds lick wounds after mass redemptions

Pressure eases after two days of outflow surge; Amfi requests doubling of borrowing cap, in addition to existing help

The mutual fund (MF) sector, battered by sharp outflows from various fixed income schemes in the past two days, limped out of the mess on Thursday.

Slowing redemptions and the Reserve Bank of India (RBI)'s special window for banks to meet the cash requirements of MFs, which opened on Thursday, helped ease the pain. However, the absence of fresh inflows is keeping the industry on the edge.

MFs faced one of their highest single-day outflows on Tuesday since October 2008, when Lehman Brothers shut down, triggering a global financial crisis, after RBI's move on Monday to make it more expensive for participants to borrow short-term money triggered panic in the bond markets. While aimed at easing the pressure on the rupee, the market interpreted it as a move to tighten short-term rates.

Yields rose and dragged down prices (bond yields and prices move in opposite directions), squeezing net asset values of all debt schemes including liquid, gilt and short-term bonds.

Investors, mostly banks and companies, pulled money out of liquid schemes, in which they park idle funds. Liquid schemes invest in money market instruments, short-term corporate deposits and bonds with maturity of three to six months. By unofficial estimates, institutions might have redeemed Rs 70,000-75,000 crore from money market schemes in the past two days, with the bulk on Tuesday. Investments by these investors account for almost 75 per cent of the total assets under management of liquid schemes.

Outflows from debt schemes reduced to a trickle on Thursday compared to the earlier two days, said MF officials. This is partly because banks and companies hardly pulled out any money on Thursday, while high net worth individuals have largely stayed put to avoid redeeming at losses, said officials. "There was a knee-jerk reaction. But once the severity of the measures subsided, the markets calmed, which is why we saw lower redemptions," said Killol Pandya, senior fund manager, debt, at LIC Nomura MF.

RBI's special liquidity window helped, with many MFs tapping the facility. The three-day repo window allows banks to borrow a total of Rs 25,000 crore at 10.25 per cent for MFs. "Many funds felt it was better borrowing from the window than selling illiquid securities such as CP (commercial paper) at a loss," said the chief executive of an MF.

 

The Association of Mutual Funds in India (Amfi) has approached the regulator, the Securities and Exchange Board of India (Sebi), seeking easier borrowing norms for the segment, said officials. Amfi has sought raising of the borrowing cap at 20 per cent of the net assets of a scheme to 40 per cent, to enable more borrowing.

Officials said smaller funds were squeezed more than their larger counterparts due to redemptions. This is because debt assets of smaller funds are mostly driven by large investors such as banks, which pulled out most of their money.

However, unlike October 2008, many funds managed to stay afloat after the crisis because of Amfi's directive on Tuesday to mark all their portfolios to market values (meaning revaluation at current prices of all assets), said officials. This forced them to pass on the losses to investors, unlike in 2008, when MFs took it on their books.