Demonetisation could see anywhere between Rs 8 and 12 lakh crore coming into the banking system in the next few weeks.
The move to withdraw high-denomination bank notes could open the floodgates for temporary inflows into the Rs 16 lakh-crore mutual fund sector.
According to estimates, MFs could get an incremental Rs 50,000 crore in the next two months by way of investments from banks, which are flush with liquidity.
It is estimated that the total value of currencies in the Rs 500 and Rs 1,000 denominations at the end of March 2016 was about Rs 14.3 lakh crore. Depending on the quantum of black money, anywhere between Rs 8 and 12 lakh crore could come into the banking system in the next few weeks.
Of this, a small portion, estimated at about Rs 50,000 crore could flow into the debt schemes (mostly liquid schemes) of mutual funds over the next two months, said experts.
"Mutual funds will be able to garner some money from the banking system, temporarily. But the impact will be limited as banks cannot invest more than 10% of their net worth in liquid funds.
“Secondly, it remains to be seen how much of this money will come into short-term debt funds as they are slightly long-term in nature," said Dwijendra Srivastava, CIO-debt, Sundaram Mutual Fund.
Liquid funds invest in securities with a residual maturity of up to 91 days, primarily in money market instruments like certificate of deposits, treasury bills, and commercial papers.
Banks and companies are the major investors in liquid funds, contributing over 90% to the assets of these schemes. In 2011, the Reserve Bank of India had instructed banks to limit their investments in liquid schemes to up to 10% of their net worth.
As of October 31, liquid funds contributed Rs 2.7 lakh crore of the Rs 16 lakh crore AUM of the MF sector.
According to experts, only the larger banks have been investing significantly in mutual funds in recent months; now, the smaller banks could also increase their investment following the liquidity spike.
Demonetisation could also indirectly help the mutual fund sector by increasing the quantum of savings coming into financial assets. Since demonetisation is expected to improve the government's fiscal situation and ease inflation, interest rates may decline over the next one year.
"As tax compliance improves and bank deposit rates decline, more investors will look at investment avenues such as mutual funds," said Srivastava.
Experts believe that the demand contraction into key sectors such as real estate and other products and services will result in a decline in credit off-take for banks. This, in turn, will push them to look at alternative sources of income such as third party products.
"An estimated Rs 5-7 lakh crore is expected to come into the financial system in the next two months and 25-30% of this might make its way into mutual funds over the next six months owing to the push from banks for higher revenues from third-party products and the decline in interest rates," said Himanshu Vyapak, deputy CEO, Reliance Nippon MF.
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