Mutual funds bet big on CDs

Mutual funds are investing heavily in certificate of deposits (CDs) due to huge supply from banks at attractive rates, fund managers said on Friday.

In order to reduce the portfolio maturity, funds are reshuffling their portfolio in favour of such short-term papers by offloading long-term bonds.

Suyash Choudhary, fund manager at Standard Chartered Mutual, said, "Huge amount of issuance (of CDs) are lined up at attractive yields. The yield on one-year CD is between 6.15 per cent and 6.25 per cent and these issues are available more in September."

Banks are lining up CDs now in order to enhance their deposit base ahead of the quarterly results, fund officials said.

Dhawal Dalal, fund manager at DSP Merrill Lynch Mutual, said, "As we approach the quarter end, most of the banks offer good rates on fixed deposits as they have mobilisation targets. Since mutual funds are not investing in FDs, banks are converting a part of FD mobilisation into CDs."

Some fund managers said banks are offering good rates on CDs due to quarter-end targets for deposit mobilisations.

Allahabad Bank, State Bank of Patiala, Indian Bank, UTI Bank and Punjab National Bank are offering attractive yields on CDs, they said.

On Thursday, Punjab National Bank placed around Rs 500 crore of 1-year CDs at 6.05 per cent. On Wednesday, State Bank of Patiala was placed around Rs 4.7 billion of 1-year CDs at 6 per cent.

Dalal said, "Yields on one-year CDs is around 6.25 per cent, which is very good. The credibility of these banks is also leading to fund activity in CDs." Dalal said inflows into short-term schemes are leading to buying in CDs.

Mutual funds are modifying the maturities of debt schemes by replacing corporate bonds. Choudhary said, "Funds are changing the maturities of debt schemes by replacing bonds with CDs as CDs are offering good rates," he said.

Funds are receiving moderate inflows in short-term funds, which is also leading to investments in certificate of deposits.