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The Rs 8.1-lakh-crore mutual fund (MF) sector, main player in the debt market, has turned a net seller after two years. According to figures from the market regulator, the Securities and Exchange Board of India's (Sebi) website, MFs were net sellers to the tune of Rs 21,476 crore till July 30. Given the high sales, those in the industry said the month would close in the red, a first since August 2011. In June, they were net buyers of Rs 64,619 crore.
Fund houses came under pressure after the Reserve Bank of India (RBI) announced on July 16 that the daily liquidity adjustment facility would be capped at Rs 75,000 crore to stem the rupee fall. Since then, fund houses have been net sellers every day and sold debt instruments of Rs 43,000 crore. Said Sundeep Sikka, chief executive officer, Reliance MF: "After the RBI action, banks, companies and high net worth individuals put some redemption pressure to raise cash. But I believe it is a short-term phenomenon." Experts say withdrawals are mainly from short-term liquid funds, forcing fund houses to liquidate some of their holdings. Said Arun Kejriwal, founder, Kejriwal Research, "The effect of RBI action on bond yields meant that liquid funds turned negative, leading to huge redemption pressure in recent weeks."
Indications of selling pressure were there immediately after RBI announced the capping of liquidity. The Association of Mutual Funds in India and Sebi had approached RBI, which opened a special three-day repo window of Rs 25,000 crore. However, those in the sector said most fund houses chose to sell instruments than borrow from this window. According to an expert, at 10.25 per cent, the cost of borrowing from this window was too high.
"If a fund house borrowed from a bank at this rate, the cost for borrowing Rs 500 crore for even seven days would have been almost Rs 1 crore. Fund houses who manage Rs 500 crore in a liquid fund for the entire year earn 10-20 basis points or Rs 50 lakh-1 crore. So, using this window wasn't the cheapest way for fund houses," said the marketing head of one fund house.
Sikka expects things to improve once the volatility in the rupee comes down. "I expect improvement in a week or 10 days," he added. Some others feel the readjustment could take some more time. "I expect things to start improving by the end of August or early September. At present, there is a demand from liquidity that is leading to selling," said the head of fixed income of an MF house.
Domestic MF houses are substantially bigger players in the debt market than foreign institutional investors (FIIs). For instance, since January, FIIs have been net sellers, of Rs 21,307 crore; MFs have been net buyers of Rs 2.7 lakh crore. As of June-end, liquid and money market funds held as much as Rs 1.62 lakh crore and income funds had assets of Rs 4.41 lakh crore. In the past two years, MF houses have been net sellers in equities as well, due to constant redemption pressure from investors. Those who'd entered the market at the height of 2007-08, when the Sensex hit 20,000 for the first time, exited their holdings after every subsequent market high.
