Fixed income MFs witnessing major turmoil

11 Oct, 2008, 2020 hrs IST,Gaurav Pai, ET Bureau
MUMBAI: Fixed income mutual funds, the engine which fuelled the growth of the Indian mutual fund industry for a long time now, are now witnessing their first major turmoil.

Stunned by the turbulence in the global financial markets and with concerns emerging relating to the asset quality on the portfolio of local fund houses, institutional investors are pulling out of their investments from these funds. In fact, broking industry officials said two leading fund houses had to face heavy withdrawals in the past couple of sessions that led to their net asset values slipping into the red.
This development comes in the wake of capital market regulator SEBI directing all fund houses to furnish details about the inflows, outflows, break-up of certain assets among others. Fund houses under the aegis of Amfi, a trade body of all MFs, have now approached SEBI for help in tiding over this grave liquidity crisis. Indications are that banks may be nudged by policy makers to offer credit lines to desperate fund houses.

Over the past few years, fixed income funds have come to account for more than two-thirds of the industry’s assets, aggregating close to Rs 5.5-lakh crore. These mainly consist of liquid funds (shortest duration and supposedly highest liquidity), liquid-plus funds (slightly longer duration) and fixed maturity plans (closed-ended funds of pre-announced tenure).

But with credit derivatives market in America in a mess, investors have increasingly become sceptical about the credit quality of assets in fixed income funds. So, while fund managers have been trying to calm tempers saying the portfolio of Indian MFs remains satisfactory, investors have been rushing to reclaim their monies. With the tightening of liquidity, this redemption process has become a real challenge for fund managers.

According to data obtained from independent research sources (Kotak Mahindra bank, Reliance Money, Yes Bank) the NAV of the liquid-plus scheme of Franklin Templeton fell by 26% on Wednesday. Broking officials said this could have been due to redemptions, prompting the fund house to sell its investments at a discount in the market. But Templeton denied this claim. “The NAV of a liquid fund is dependent on the movement in bond market yields. The recent sharp tightness in systemic liquidity has pushed short-term yields up sharply,” Franklin Templeton Investments CIO (Fixed Income) Santosh Kamath said while explaining the negative movement in its NAVs.

One of DSP Merrill’s liquid-plus schemes also shed 5% of its NAV on Wednesday. In the race to spruce up their returns, fund houses have increasingly taken recourse to investing in illiquid papers and securities of longer duration (something that liquid funds are not supposed to invest in.) When redemptions set in, exiting either of these will become an issue and they will have to sell assets at a discount, thus starting a vicious cycle.

Via:E.T