MFs shun commercial papers

Spreads have widened by 250 to 300 bps now, from just 15 bps a year ago.

Birla Sun Life Mutual Fund recently reconstructed the portfolio of its short-term income fund to invest only in certificate of deposits (CDs). The fund, catering largely to institutional investors, raised close to Rs 3,000 crore in this market. 
 

Tata Mutual Fund has also come out with a 371-day fixed maturity plan, Tata Fixed Horizon Fund – 20 Scheme A. In its indicative portfolio, the fund house has indicated that it will invest only in bank CDs. 
 

Even Principal Mutual Fund has launched a 91-day FMP-Series XIX, indicating no exposure to commercial paper.

Mutual funds, which not so long ago were lapping up commercial papers (CPs) with a six month to one year tenure, have now turned cautious and prefer to deploy funds in CD. The demand for CPs has slackened thanks to the liquidity situation in the CP market as also demand from institutional investors.

 

CPs are an instrument used by companies to raise funds largely for working capital requirements. CDs are fixed rate savings vehicles for investors who do not need cash immediately. The Reserve Bank of India (RBI) had announced last month that mutual funds would be allowed to borrow from banks against CDs. Immediately after that, the spreads in the CP market shot up as a large number of CPs got dumped into the market.

Fund managers said that the spreads of CPs have widened by as much as 250 to 300 basis points now, from just 15 basis points a year ago. Some recent funds have taken very low CP exposure because of this reason. "The CP market has become illiquid and so spreads have gone up. Going forward, we would hold most of our portfolio in CDs," said Mohit Verma, chief investment officer and executive director-fixed income at JM Financial investment managers.

On Wednesday, mutual funds hold close to Rs 1 to 1.25 lakh crore worth of CDs, according to industry estimates. The total window of liquidity provided by RBI for mutual funds and NBFCs is Rs 60,000 crore. This means that mutual funds would have enough CDs to access this window, even if the Rs 60,000 crore is accessed only by mutual funds.

While several non-banking finance companies (NBFCs) and real estate companies were major issuers of CPs in the past, there are also other companies that enjoy a AAA+ rating that issue CPs in the market. However, even these issuers are finding it hard to raise funds in the current market conditions.

"Liquidity is still tight on the shorter end. There are few takers for longer duration (1 year) CPs. Even top notch companies have to pay as much as 13.5 to 14 per cent for funds," said Vikas Jain, senior vice president at AK Capital, a merchant banker for fixed income securities in India.

Interestingly, even investment advisors are advising investors to invest in fund schemes that deploy money in CDs because CDs are perceived as safer instruments. "This is a trend that started two months ago. Increasingly,mutual funds are launching more such FMP schemes. We, too, are advising clients to put their money in FMPs that have portfolio of bank CDs," said Suresh Sadgopan, a certified financial planner.

Sriram Venkatasubramanian, head- wealth management at FCH Centrum Wealth Management said," We have seen that few mutual funds have delivered lesser returns than what was indicated at the beginning of the FMP. This happened as a lot of investors redeemed last month due to fear of default. In such schemes, investors who remained till the end suffered as the fund house was stuck with illiquid papers.

As there are still doubts on the credit quality of mutual funds, we are suggesting to clients to invest in schemes that have a portfolio of banks' CDs only and are short-term; that is, less than three months, he added.