Liquidity crunch: MFs put cap on redemption

16 Oct, 2008, 0030 hrs IST,Pooja Meswani & Reena Zachariah, REUTERS
MUMBAI: The liquidity crunch in money markets is exacting a heavy toll on some small fund houses that have been hit by massive redemption pressures. ABN Amro MF has now put a cap on redemption on its long-term FMP schemes. All investors in these schemes can redeem only Rs 1 lakh per folio per day.

“As a short-term measure, the trustees of the mutual fund, in order to safeguard the interest of the investors who want to remain invested till the maturity of the long-term FMPs, today have decided to limit the redemption to 5% of the size of these schemes per day, with a further limit of Rs 1 lakh per investor, per day,” said ABN Amro India-AMC managing director Nikhil Johri.

What is making matters worse for ABN Amro is that its schemes are in the no-load period for a month, due to the recent change in management control. This makes it all the more easy for investors to pull out their funds.
In the offer document (OD), mutual fund houses mention that the trustees can under unforeseen market circumstances limit redemptions temporarily. According to industry players, trustees of many mutual funds have instructed distributors that redemptions for all fixed income schemes should be paid only within 10 days from the date of redemptions.

Another fund that appears to be under stress, according to market sources, is Edelweiss Mutual. The fund has seen the asset size of its maiden liquid scheme launched last month, shrink from Rs 730 crore to nearly Rs 230 crore.
Mirae Asset Management Company, a fund into its second year of operations in India, failed to report the net asset values (NAV) of its two liquid schemes — Mirae Asset Liquid Fund & Mirae Asset Liquid Plus Fund — on October 14. The company refused to comment on the development.

Due to tightness in the money market, the AMC may have found it difficult to sell securities to raise the required amount. Unable to settle accounts at the end of the day, the AMC would not have reported the NAVs of the two schemes.

Experts say in extreme situations, certain securities like government bonds or corporate debt papers may become illiquid. A fund house may not be able to sell securities immediately, and so, cannot raise money to return to investors in the case of higher than usual redemption requests.

As on 30 September, Mirae’s assets stood at about Rs 2,309.8 crore. Of which, close to Rs 1,864 crore is in liquid and liquid-plus funds. Sources say the size of these assets have plunged in the past 10 days, and the fund is now unable to meet redemption requests. The AMC, however, has reported NAVs of both the schemes for October 15.