Companies park surplus cash in debt MFs

CY15 inflows into liquid funds highest in at least 10 years

Corporate treasury exposure to debt mutual fund schemes continues to scale new highs. Net inflows into liquid funds stood at Rs 40,302 crore in calendar year 2015, highest in at least 10 years, data from Value Research shows.

Corporate treasury managers’ interest in such schemes has grown consistently. In the last financial year (2014-15), country’s top non-financial companies invested a third (33.3 per cent) of their surplus cash in mutual funds — the highest in at least previous eleven years. The ratio was 30 per cent in 2013-14.

In the past three years, the share of debt mutual funds in corporate treasury is up nearly 1,600 basis points from 17.6 per cent in FY12. One basis point is one-hundredth of a per cent (see charts).

The analysis is based on the balance sheet figures of the country’s top 654 non-financial companies from BSE 500, BSE-Mid-cap and BSE Small-cap index. The sample data for investment in mutual funds includes all kinds of schemes, including liquid funds.

The country’s top 654 non-financial listed companies invested Rs 2.68 lakh crore in mutual fund units at the end of the last fiscal, up from Rs 2.32 lakh crore a year ago and Rs 1.08 lakh crore in FY12. On the other hand, the sample companies were sitting on cash and equivalent worth Rs 8.04 lakh crore at the end of last financial year.

Corporate flows in mutual fund units are supported by falling capex and strong profitability of cash rich companies in sectors such as IT, pharma, FMCG and auto among others. Incremental capex by the sample companies was down 20 per cent last fiscal while cash and equivalent on their books rose four per cent on year-on-year basis.

“Corporates that did not use their money for new projects and capacity creation, parked it in liquid funds instead of keeping it in low-yield bank deposits,” says Lakshmi Iyer, CIO, debt, Kotak MF.

The interest rate cycle has also played a role here. An increase in MF investments by corporates went hand-in-hand with a general softening of interest rate in India that boosted bond prices, allowing corporate treasuries to book profits on their bond portfolio.

Yield on 10-year government bond is down nearly 100 basis points in the last four years from around 8.8 per cent in early 2012 to 7.8 per cent currently. Interest rate and bond prices share an inverse relation.

Surplus cash from promoter stake sales in small firms and private equity or venture capital funding have also made their way into these funds, said market experts. “We have seen some ‘new money’ come into these funds, especially from e-commerce firms and start-ups that have received private equity/venture capital funding,” says the CEO of a top mutual fund.

Liquid funds invest primarily in money market instruments like certificate of deposits, commercial papers and term deposits. These funds provide high liquidity and minimal risk as they use a buy and hold strategy, investing in securities with a residual maturity of 91 days or less. Corporates and banks are the primary investors, with corporates making for 60-70 per cent of the money deployed in these funds.

Apart from corporates, there was an increase in bank money coming into these funds. “With credit growth slowing in 2015, banks have been deploying a higher proportion of their funds into liquid and ultra-short-term funds,” says Manoj Nagpal, CEO, Outlook Asia, a wealth management firm. He says the trend may continue in 2016 as well because credit growth has not picked up meaningfully.

In September, the RBI brought down the ceiling on SLR securities in the ‘held to maturity’ (HTM) category, enabling banks to have more money in hand. This excess cash has also found its way into these funds.

With 1-year average category returns of about 8 per cent, liquid funds have scored over current account deposits and short-term bank fixed deposits. “For the most part last year, returns given by liquid funds were about 100 basis points higher than current account and short-term fixed deposits. That’s why a lot of ultra high net worth individuals and private, unlisted companies chose to park their money in these funds,” says Killol Pandya, head – fixed income, Peerless Mutual Fund.