CRR hike not to hit liquid funds

Mutual fund managers do not expect any outflows from short-term schemes, especially liquid funds, despite the 50 basis points hike in cash reserve ratio to 6 per cent.

In fact, short-term schemes are seen attracting inflows, as rates on short-term bonds are likely to improve amid tight inter-bank liquidity, they said.

Sameer Kamdar country head at Mata Securities said: "There are no chances of redemption from banks as banks are hardly any major investors in liquid funds now. Whatever investments they had in liquid funds, were redeemed earlier to meet CRR hike."

Banks, which were considered as major investors in liquid funds, have redeemed around Rs 150 billion in December when the Reserve Bank of India hiked the cash reserve ratio by 50 basis points to 5.5 per cent.

In an attempt to control the surging inflation and liquidity, the central bank again raised CRR by 50 bps to be effected in two stages-one on Saturday and other on March 3.

Fund officials feel this would augur well for short-term schemes, as the rates on short-term bonds are likely to rise further amid tight inter-bank liquidity.

Ritesh Jain, debt fund manager of Kotak Mahindra Mutual said: "Mid-March, we expect returns of liquid funds to go up to 7.75-8 per cent."

For year to Tuesday, liquid funds category recorded 6.55 per cent average return.

Also, fund officials feel there would be no shifting of money from debt schemes to bank deposits even if banks hike their deposit rates.

Kamdar said, "Money would still flow in short-term debt schemes such as liquid, fixed maturity plans, and floaters. Short-term returns would go up. Post-tax, debt funds would be better tax instruments than bank fixed deposits as in bank FDs, the tax rate is as per the applicable income tax rates. While in debt funds, investors have to pay 20% long-term capital gains tax after reducing the rate of inflation (also called as indexation benefits). "

Echoing similar view, Jain of Kotak Mutual said, "there would be lots of interest in FDs as the product in similar to fixed deposit and is more attractive in terms of tax benefits compared with bank deposits.