Liquid funds see big withdrawals

Rs 10,000-crore redeemed in December.

Liquid and cash schemes of leading mutual funds have seen redemption of around Rs 10,000 crore in a liquidity-strapped market in December.

At least five mutual funds had to tap their credit lines to meet the redemption pressure, sources said. The names of the funds could not be confirmed.

Also, the net asset values of some of the floating rate and liquid funds have turned an unprecedented negative after bond values rose sharply over the past few days with the tightening liquidity.

"Mutual funds have seen substantial redemption this month because of the advance tax and the tight liquidity in the money market over the redemption of the India Millenium Deposit," said Rajiv Anand, chief investment officer, Standard Chartered Mutual Fund.

In the last three days alone, short-term bond yields arose 65 basis points which eroded the value of some floating rate and liquid funds, Anand explained. The biggest losers have been short-term funds from the Templeton, Deutsche, Sundaram, HDFC, Grindlays and Birla stables.
 

MONEY MATTERS
Top losers	% Chg
NAV change between December 19-21, 2005
Templeton India STIP	-0.21
Deutsche Short Maturity Fund	-0.18
Sundaram Select Debt - S T A P - Appreciation	-0.17
HDFC HIF - S T P	-0.13
Grindlays SSIF - Short Term	-0.12
Birla Bond Plus - I P	-0.11
PRINCIPAL Income Fund - STP	-0.09
Grindlays F R F - LTP	-0.08
Prudential ICICI STP	-0.08
Chola F I - S T F - Reg	-0.05
DSP ML Short Term Fund	-0.05
HSBC Income Fund - S T P - Reg	-0.05
HDFC Short Term Plan	-0.03
Templeton Floating Rate Income Fund LT	-0.02
Chola FRF	-0.01
JM Short Term Fund	-0.01
Tata Short Term Bond Fund	-0.01

"Money is moving out but the situation should reverse sooner than later," Kotak Mahindra Mutual Fund CEO Sandesh Kirkire said. "Every year withdrawal escalates in December due to advance taxes," said S V Prasad, chief executive officer, Birla SunLife Mutual Fund.

Cash funds had faced substantial redemption during Diwali though not to the same magnitude. "This kind of crisis has not been seen in a long time", an industry expert said.

The call money market is in a liquidity crunch with rates shooting up to 6.60 per cent last week, though now they have eased to 5.75 per cent.

Banks, which invest in liquid funds to exploit the spread over the Mibor, have withdrawn from mutual funds as Mibor rates now are far higher. The Mibor is hovering around 6.34 per cent.

Similarly, corporate investors have also pulled out to meet their tax obligations. Besides, deposit rates are now significantly higher than cash fund returns, which make the latter less attractive.