Liquid schemes propel corporate bond marts

Backed by heavy inflows from liquid mutual fund schemes, trading volumes in corporate bonds have surged in June and July and the cumulative figure is set to cross Rs 25,000 crore in August.

Analysts said mutual funds have increased their exposure to corporate bonds, after most liquid fund investors shifted to liquid-plus schemes, which can invest a bigger part of their corpus in short- and long-term corporate bonds.

Besides, they said, with excess liquidity in the system, fund managers opted for corporate bonds, whose yields went up significantly in July.

As per the Securities and Exchange Board of India (Sebi) data, trading in corporate bonds, including over the counter trades (OTC) and trading through exchanges, stood at Rs 24,164.22 crore between January and July. This means the average daily turnover was Rs 142 crore.

"Till May, the liquidity situation was tight. Institutions, especially mutual funds, were not investing into corporate bonds in line with their liquid fund corpuses. But in June, interest rates softened to some extent. Under liquid-plus schemes, the funds can invest in long-term corporate bonds, so the fund managers tried to generate capital gains by investing in these bonds," said Sandeep Bagla, chief investment officer (fixed income), AIG Investments.

Liquid-plus schemes investments attract lower dividend distribution tax (DDT) of 14-15 per cent, while liquid investors have to pay up to 23 per cent DDT on his investments. As a result, banks and corporates have been shifting their investments to liquid-plus schemes instead of liquid funds.

Liquid schemes cannot invest more than 10 per cent of their corpus in six-month to one-year bonds under the mark-to-market category. But, liquid-plus schemes don't have such restriction.

"In this scenario, money coming into liquid-plus schemes flowed into corporate bonds as gilt yields came down a little after hitting a peak, while call markets were giving nil returns," said S Srinivasa Raghavan, head (fund management), IDBI Capital.

In July, the mutual fund industry saw the biggest growth in assets under management, as Rs 44,770 crore flowed into liquid and money market schemes. Trading has gone up following the changing the market scenario.