Over the last couple of months, a lot of debt mutual funds have shifted their assets into short-term money market instruments. The reason: they want to be ready to meet redemption pressures in the last quarter of this financial year.
As a result, their investments in collateralised lending and borrowing obligations (CBLOs) have risen from Rs 4,500 crore as of December to Rs 19,000 crore by February-end.
CBLOs are short-term (overnight to 90 days) securities where the borrower returns the money on a pre-decided future date or time. This is an instrument issued by the Clearing Corporation of India. Mutual funds usually invest in CBLOs that have an overnight tenure, or up to a fortnight.
The yields on these instruments are around 3.5 per cent per annum. Although other money market instruments, like certificates of deposit (CDs), earn higher returns at 7-8 per cent, they are of a longer tenure. CDs and commercial papers (CPs) form the largest portion of liquid funds’ and fixed maturity plans’ portfolios, but fears of a sudden redemption pressure are mostly mitigated by short-term instruments like CBLOs and repos, especially towards the close of a financial year.
“Usually, fund houses face redemption pressures in the January-March period. To meet them, fund managers prefer to park more money in short-term instruments which offer quick liquidity, if required,” said Amandeep Singh Chopra, head (fixed income), UTI Mutual Fund.
Liquid and liquid-plus schemes are the largest investors in CBLOs. The latter’s nomenclature has been changed from the month of February, according to recent Sebi guidelines. The industry has witnessed a rise of 25-30 per cent in incremental money flowing into CBLOs under liquid schemes.
| MONEY FLOW MF investments in money market instruments ( Rs in Crore) | |||
| Type of Instrument | Sept '08 | Feb '09 | Growth (%) |
| Certificate of Deposit | 92,790.81 | 1,18,146.23 | 27.32 |
| Commercial Paper | 45,024.57 | 48,108.77 | 6.85 |
| Collateralised Borrowing & Lending Obligation (CBLO)* | 1,894.32 | 18,565.77 | 880 |
| Source: Value Research Online *The investment crossed Rs 19,000 crore in March (Industry estimates) | |||
“The surge in CBLO inflows could also be explained by the fact that there is a drop in the number of CDs and CPs being issued now. Both banks and financial institutions that float CDs seem to have enough liquidity at the moment,” said a senior official with the Securities and Exchange Board of India (Sebi).
The industry has also become more risk-averse. During the month of October, when fund houses lost Rs 97,000 crore in a single month, many of them had invested in slightly longer term CDs and CPs to gain higher returns. However, when investors hit the redemption button at the same time, these fund houses were forced to seek the Reserve Bank of India’s help to meet redemption requirements.
“Although fund houses earn higher spreads in CDs, they are looking at CBLOs and other short-term instruments now. The October crisis took place primarily due to funds’ huge investments in instruments that were illiquid in the short-term,” said a senior executive at a leading domestic fund house.
While mutual fund investments in a couple of public sector banks’ CDs have gone up this week, the chief investment officer of an international fund house pointed out that, as March approaches, traditionally, the liquidity condition tends to get tighter.
“Also, concerns over redemption pressure in liquid funds increase during the January-March period, which compels fund houses to deploy more money towards overnight CBLOs. The trend reverses again from April,” said the Chief Investment Officer at an international fund house.
Market experts said that fund managers are likely to maintain greater prudence while investing in CDs and CPs till October 2009, to avoid a repetition of the crisis seen in the same month last year.
