Liquid Funds, A Parking Ground for Savings

Why settle for less, if you are getting more? Invest your surplus money in Liquid Funds and earn extra bps on your hard earned money..Article published in The Hindu Business Line, Aug 18, 2012.

http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3791909.ece

Equity outflows continue; industry added Rs. 31,654 crore

Mutual Fund industry saw a temporary relief after witnessing outflows in last two months consecutively. In July 2010, the industry saw a net inflow of Rs. 31,654 crore to its kitty mainly on account of net inflow of Rs. 34,303 crore in Liquid/Money Market category. On the other hand, the total AUM increased to Rs. 6.68 lakh crore, a rise of Rs. 38,420 crore or 6.10 per cent over the last month figure. All categories except FOF Investing Overseas reported an increase in its net AUM. While Income Funds comprising 50 per cent of total AUM reported a meager increase of 1.11 per cent in its AUM, Liquid/Money Market Fund category reported an increase of 46.56 per cent. The latest AUM figures for Income and Liquid/Money Market Fund stand at Rs. 3,31,949 crore and Rs. 1,05,333 crore respectively. The Other ETFs category shows a dramatic increase in AUM after Motilal Oswal Mutual Fund successfully closed its maiden fundamentally modified ETF MOSt Shares M50 with a total AUM of Rs. 236 crore. It has a total AUM of Rs. 1,532 crore, an increase of Rs. 397 crore other its last month figure. The Diversified Equity category showed a negligible increase of 0.10 per cent to Rs. 1,78,492 crore. Other categories too moved up albeit marginally.


The Equity Diversified Fund category saw a major redemption having a total outflow of Rs. 8,413 crore against an inflow of Rs. 5,013 crore, thus, a net redemption of Rs. 3,400 crore. The equity markets have already touched their February 2008 level and investors have become cautious of overheat going in the equity market as they fear a correction from this level. Moreover, some investors who were sitting at their investment since 2007 had also redeemed their money. Hence mutual funds booked profit to meet investors’ redemption pressures. As per the latest SEBI figures, Mutual Funds had net sale of Rs. 4,405 crore in July 2010.

Table: Mutual Fund Asset Growth

The Liquid/Money Market saw the maximum inflow of Rs. 34,303 crore mainly on account of switch outs from Income/Ultra Short Term Funds to Liquid Funds. After the introduction of new MTM ruling on debt securities having average maturities more than 91 days, the Ultra Short Term Funds were the worst hit. Corporate fears that it will bring volatility to the funds which will bring down the returns. They eventually shifted to Liquid Funds or redeemed their investments. The Income category saw a net inflow of Rs. 475 crore only.


In other categories, ELSS saw a new outflow of Rs. 139 entering into fourth month having outflows consecutively month-on-month. Balanced Funds too saw an outflow of Rs. 43 crore continuing its last month losing streak. However, the industry has been witnessing a major shift since last few months from active funds to passive funds. ETFs which cater to passive funds category have seen a substantial increase in inflows. The Gold ETF and other ETFs category added Rs. 155 crore and Rs. 375 crore respectively.

The month also saw the launch of 7 open-ended NFOs and 15 close-ended NFOs (mainly FMPs). The 15 close-ended income funds collected Rs. 2,444 crore from the market while the 3 open-ended close ended funds collected Rs. 840 crore. The income category NFOs were Axis Income Saver, Canara Robeco InDiGo Fund and Peerless Income Plus Fund. The 2 open-ended Equity NFOs, mainly Mirae Asset Emerging Bluechip Fund and SBI PSU Fund collected a total of Rs. 705 crore. In other ETFs category, Motilal Oswal MOSt Shares M50 ETF collected Rs. 236 crore in its maiden NFO.

Source: MOSL Mutual Fund Desk

SEBI’s ruling on Mark-to-Market may shun the attractiveness of Ultra-short term funds

Since the SEBI made mandatory for Liquid Fund managers to invest in papers with maturity of up to 91 days only, the Liquid Funds lost sheen among institutional investors due to reduced portfolio returns. This allowed the market participants to shift its focus to Ultra Short Term Funds (erstwhile called as Liquid-Plus Funds). Thanks to superior returns and tax benefits over Liquid Funds, Ultra Short term funds have found a favour among all class of investors.

However, the market watchdog SEBI still not very confident about the credit stability in the market issued another directive asking all mutual funds to value money market and debt securities with maturity over 91 days (or with maturity up to 182-days) on a mark-to-market basis with effect from July 01, 2010. The ruling will require all fund managers to factor in any movement in securities prices on a daily basis to calculate the Net Asset Value (NAV) of fund. The new valuation method may increase the volatility of Ultra Short Term Funds while Liquid Funds being shorter tenure funds will be less volatile. Currently securities having maturities over 182 days are already valued at daily weighted average (mark-to-market) method. The move will ensure that the Liquid Funds and Ultra Short Term Funds are undeniably liquid by asking them to be valued in a more transparent manner.

Ultra short term schemes which comprise 40 per cent of Indian Mutual Fund industry’s asset under management (AUM) of Rs. 7.59 lakh crore have been fetching returns in the range of 5-5.5 per cent having an edge over its sibling Liquid Funds fetching returns in the range of 4-4.25 per cent. The debt instruments held by Ultra Short Term Funds (or Liquid-Plus Funds) have a longer tenure i.e. the average maturity of these funds is comparatively higher than that of Liquid Funds. Long term papers (over 91 days) help fund managers to generate extra returns over short term papers (up to 91 days). Recently the RBI hiked the CRR by 75 basis points which increased the returns on Commercial Papers and Certificate of Deposits by around 100-150 basis points.

In the last few months, there have been continuous net outflows from Liquid Funds due to high dividend tax structure and restrictions to invest in papers having maturities up to 91 days only. Liquid Funds charge a dividend distribution tax (DDT) of 28 per cent unlike in Ultra Short Term Funds where the DDT is 14 per cent for individual and 22 per cent for corporate, thus, clearly giving a tax advantage of 8 per cent. Treasury Officials, CFOs etc prefer Liquid Funds and Ultra-Short Term Funds over Banks’ Fixed Deposits where interest income is charged at 33 per cent.

By issuing out the current directive, the regulator SEBI wants to make sure that the Oct 2008 Credit Crisis is not repeated where the RBI has to open a lending window for Mutual Funds for a limited period to ease out the crisis. However, the industry will continue to enjoy additional returns in Ultra Short Term Funds, though at a slightly higher risk as long as the tax-arbitrage is in existence over Liquid Funds and banks’ Fixed Deposits. The market will actively watch the upcoming Annual Budget on Feb 27, 2010 where the government may take away the tax arbitrage in Ultra Short Term Funds to make sure that Banks’ FDs are actively used for placing excessive unused funds, thus, bringing out a kind of stability in the credit market.