Last week was unprecedented in the history of the Indian mutual fund industry-- the net asset values (NAVs) of nearly a dozen liquid-plus funds fell.
For instance, the NAVs of six liquid-plus funds of Mirae Asset Management Company dropped by more than Rs 7.50 on Monday and by over Rs 6 on Friday --a fall of Rs 13.50 in just two days (on a face value of Rs 1,000).
Several others suffered a similar fate, though to a lesser degree. The reason--redemption pressures from institutions that resulted in sales from these funds at whatever price they could get from the market. And, there were rumours that some funds even defaulted.
Liquid-plus funds are ultra short-term funds used by companies as substitutes for bank deposits. Unlike pure liquid funds, which invest in only short-term papers with maturities of less than a year, liquid-plus funds invest a larger part of their portfolios in longer-term papers to generate better returns. Being open-ended funds, investors can withdraw anytime from the latter category.
A senior executive at a fund house facing redemption pressure said smaller funds have suffered more because of the overall rush to redeem. "It is basically because of high anxiety levels among corporate clients. Today, even retail investors have joined the bandwagon." Almost Rs 30,000 crore has been redeemed since the beginning of the month, he said.
Unsurprisingly, the NAVs of some funds have gone below the face value. What is surprising about the loss in value is that these funds invest in papers that give a fixed rate of return. Therefore, there is no reason for their NAVs to fall. However, due to huge redemption pressure, funds have been forced to sell these papers at a lower price.
As a fixed income head of a mutual fund said, "The situation is pretty bad. Out of 34 or 35 schemes, 25 are selling and the rest are sitting tight."
Another fixed income fund manager, a large number of companies have approached them for redemptions in the last couple of weeks. Companies have over Rs 53,059 crore in liquid-plus funds and another Rs 63,473 crore in liquid funds. Retail participation in these funds is Rs 19,445 crore and Rs 16,402 crore respectively.
These funds invest mostly in certificates of deposits (CDs), issued by banks and commercial papers (CPs) of companies. According to industry sources, liquid and liquid-plus funds have exposures of Rs 22,740 crore and 22,860 crore in bank CDs. Another Rs 12,861 crore and Rs 9,772 crore are in CPs.
Last Friday, the Reserve Bank of India sought data from the mutual funds on their exposure in different debt instruments. CPs of real estate and non-banking financial institutions have been in trouble because of repayment issues.
on Tuesday, with investors rushing to redeem, most fund managers are facing the basic problem of raising cash. With the opening of the window of Rs 20,000 crore by RBI on Tuesday, they are hoping for some relief.
