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Cash plans lure banks as overnight rates drop

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Newswire18 Bangalore
Last Updated : Feb 05 2013 | 12:50 AM IST
The fall in call money rate today made liquid plans a more attractive investment option for banks to park their money in the short term and benefit from the high returns, fund managers and distributors said today.
 
After the huge redemptions in March, mutual funds are again seeing an interest in their liquid funds from companies as well as banks, industry officials said.
 
Today, the call rates opened below 4 per cent . At 1:30 pm, they dipped to 2 per cent compared with Wednesday's close of 4-4.75 per cent. Liquid funds, on an average, give 7.02 per cent annualised returns. Many banks thus deployed their funds in this short-term money management tool.
 
However, banks are likely to redeem their investments in cash plans from Friday to meet the cash reserve requirements as the first stage of the 50-basis-point hike in cash reserve ratio comes into effect on Saturday. This will drain Rs 7700 crore from the banking system.
 
On March 30, RBI hiked CRR by 50 basis points to 6.5 per cent. The hike will be implemented in two equal stages, on Saturday and on April 28.
 
Ravi Sharma, chief executive officer, Birla Sun Life Distribution said, "Money has started coming back because the call rate is low. But we have to see how much will go out tomorrow (Friday) due to the CRR hike."
 
During March, investors had redeemed their investments in liquid plans because of January-March corporate advance tax payments, surge in call money rates and the alarmingly high returns of 20 per cent on one-month deposits offered by banks.
 
Sharma said, "Even if the banks put money into liquid plans for one day, the return is so high when compared with the call rates."
 
Some top performing schemes such as DWS Money Plus, ICICI Prudential Liquid Fund and LICMF Liquid Fund posted 7.81 per cent, 7.69 per centand 7.57 per cent one-year returns respectively. Birla Sun Life Distribution saw an interest in liquid funds to the tune of about Rs 700-800 crore today alone, Sharma said. Companies accounted for a major chunk, he said.
 
Companies find cash plans attractive over zero-interest earning current accounts because liquid plans do not levy any entry or exit fee and are hence, considered efficient cash management tools.
 
Shalini Tibrewala, fund manager, JM Financial Mutual Fund, said, "Banks are very interested in liquid funds. In fact, interest (applications) from banks has come even after 12 pm. (the cut-off time for accepting applications). But, we have not accepted applications that came after 12 pm."
 
JM Mutual Fund today received net inflows of over Rs 200 crore from banks as well as companies, Tibrewala said.
 
In case of liquid plans, if the application is received up to 12 pm, the closing NAV (net asset value) of the day preceding the day of receipt of application is applicable.
 
Applications that come after 12 pm are processed at the closing NAV of the day preceding the next business day.
 
Ganti Murthy, fund manager, SBI Mutual Fund, said, "Banks are showing interest in cash plans now due to the arbitrage opportunity between call money rate and liquid funds."
 
According to industry officials, SBI Mutual Fund received inflows of around Rs 1000 crore in the last three-four days through its SBI Insta Cash Fund. As of March-end, the assets of SBI Insta Cash Fund had eroded to Rs 273 crore from Rs 2238 crore in February.

 
 

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