The mutual fund industry has suffered an erosion of a whopping Rs 1 lakh crore (Rs 1,000 billion) during the month of March alone due to huge redemptions from banks and institutional investors in liquid and money market funds.
The total investments of the fund industry in debt papers like certificate of deposits, commercial papers and collaterised borrowing and lending obligations stood at around Rs 184,000 crore (Rs 1,840 billion) at the end of February. Industry experts said that by March-end, this corpus had depleted by over 50 per cent.
"The industry would have lost around Rs 1 lakh crore (Rs 1,000 billion) as banks and institutions redeemed their investments during the last week of March," said Jaideep Bhattacharya, chief marketing officer, UTI Asset Management Company.
Over 80% of funds to come back
However, fund managers believe that at least 80 per cent of this amount would come back into the system by April 10, as the funds would start parking fresh capital into debt papers like CDs and CPs in tenures ranging from 90 days to six months.
Most of these investments will be allocated under liquid and money market funds where institutional investors own over 80 per cent.
"Investors, who take out money from liquid and money market schemes, reinvest it mostly through the same schemes in the first two weeks of April. Going by the exact nature of these reinvestments, these schemes may also have to buy short-term papers like CBLOs and repos, apart from renewing investments in CDs and CPs," said Sundeep Sikka, chief executive officer, Reliance Mutual Fund.
Investments in CDs and CPs are linked to the liquidity situation of the issuers of these instruments. Following the series of rate cuts by the central bank, the industry believes that the banks are flush with liquidity and the number of CD issuances may consequently come down as the banks do not feel the need to raise capital through these debt papers.
Also, as the demand for such investments shot up, the rates offered by CDs have come down, from about 8 per cent in the January-February period to about 6.75 per cent now. CBLOs and repo rates are much lower at 3-5.8 per cent.