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IL&FS effect: Mutual funds build liquidity pockets in debt schemes

Risk-aversion and uncertainty over redemptions make MFs turn to CBLO

Jash Kriplani  |  Mumbai 

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The mutual funds (MFs), in their bid to deal with the two-fold challenges of tight liquidity and redemption pressure, are shoring up the liquidity buffers within their own debt schemes. As per the Securities and Exchange Board of India (Sebi) data, the debt schemes’ exposure to the collaterised borrowing and lending obligation (CBLO) market stood at Rs 741 billion, which was 50 per cent higher than previous month. The October exposure levels were the highest seen in nine months in both absolute terms and also as percentage of industry’s overall debt exposure (5.43 per cent).

The CBLO are overnight instruments, considered highly liquid, as these instruments at the short-end can even have maturity of a day. They are also relatively safe as borrowers are required to place Government securities as collateral.

Industry officials say the debt schemes are still trying to find back their feet. “For the overall industry, there is still uncertainty of flows. The investors don’t want to take any undue risks. The few fund houses that are seeing flows come back are being asked by institutional and corporate investors to make sure their schemes have enough liquidity in place for any further volatility,” said a debt fund manager, requesting anonymity.

“The debt schemes are not yet out of the woods as far as redemption pressure is concerned. Until recently, the corporate bond market was at a stand-still. So, fund houses are building their own pockets of liquidity in their schemes, which can be tapped for redemptions,” he added.

IL&FS effect: Mutual funds build liquidity pockets in debt schemes

The liquid schemes in September saw their worst monthly redemptions in over a decade amid fears of a spillover from the IL&FS group default. The category saw an outflow of Rs 2.11 trillion, which accounted for 8.44 per cent of the industry’s assets. Some fund houses even looked at borrowing from banks to meet the redemptions, according to industry sources.

The multi-notch downgrade of IL&FS in matter of a few days froze up the corporate bond market, which made it difficult to sell even short-term papers. As liquidity dried up, the spreads for some non-banking finance companies (NBFCs) widened by 200 basis points (bps). With NBFCs facing challenges in raising money in the short-term commercial paper (CP) market, their asset-liability position came under scrutiny.

Experts add that these yields are going to be new normal for NBFCs as credit-risk assessments didn’t take into account their slowing growth rates. “The yields are only adjusting to the reality that their growths are slowing down. So, their internal equity generation has come off, which has increased leverage in their books,” another fund manager said.

Industry officials add that investors parking their money in mutual funds are now more focused on safety rather than getting arbitrage on yields and the schemes will continue to align to this shift in investors’ sentiments.

First Published: Tue, November 20 2018. 20:17 IST
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