After banks, it’s the country’s largest insurer Life Insurance Corporation of India (LIC) that has come to the aid of cash-strapped mutual funds (MFs), which are reeling under redemption pressure on liquid and fixed maturity plans (FMPs).
The public-sector insurer has pumped in over Rs 14,000 crore into liquid funds of various fund houses. This is more than three times its investment of around Rs 4,500 crore in such instruments last year.
“Last year, conditions were better. But this year, mutual funds have been facing huge redemption pressure, especially on FMPs and money market funds. These funds approached us and we have parked money across 10 top fund houses. Our investments in funds remain within the regulations of the Insurance Regulatory and Development Authority (Irda),” said LIC Managing Director Thomas Mathew T.
It could not be ascertained as to how much the corporation has invested in its own mutual fund arm, LIC Mutual Fund.
According to Irda norms, LIC can invest 50 per cent in government securities, 15 per cent in the infrastructure sector, and the remaining 35 per cent in other channels, including equity, mutual funds, fixed deposits, non-convertible debentures, certificate of deposits, and commercial papers.
Liquid or money market funds earn returns in the range of 10-12 per cent. LIC parks money in short- term liquid funds and FMPs, where the average tenure varies from two weeks to a month.
“Liquid funds and collateralised borrowing and lending obligation (CBLO) form the majority of our money market investments,” Mathew said.
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While CBLO investments are very short-term in nature, money in liquid funds can be invested either on a cumulative basis or can be redeemed and switched to other instruments.
Coming to the rescue of cash-starved fund houses, the Reserve Bank of India (RBI) had opened a special 14-day repo window on October 14, through which banks could raise up to Rs 20,000 crore and lend to mutual funds to tide over the liquidity crunch. In November, a similar window was opened for non-banking finance companies (NBFCs).
The country’s largest lender, State Bank of India, has already extended loans worth over Rs 5,000 crore to help mutual funds.
In addition to mutual funds, the public sector insurer has also invested around Rs 1,000 crore in bank fixed deposits in April-November this year.
“Banks look for bulk deposits in such times. We responded by investing money in their FDs, where the tenures vary from six months to one year,” explained Mathew.
With credit demand rising following problems in the US, banks raised deposits to tide over the pressure. From the start of the month, public sector lenders have, however, decided against accepting bulk deposits.