Surfeit of liquidity threatens funds

Return on liquid assets contributing little to bottomlines

Mutual Funds are facing a crisis. With close to 70 per cent of their corpus in liquid assets, asset management companies are facing a situation where their bottomlines are going to be severely impacted since the return on liquid assets contribute very little to the bottomlines.

To add to the worsening situation, fund houses are estimated to have lost more than Rs 10,000 crore of assets in October 2004, as corporate, institutional, and high net-worth investors have withdrawn their investments due to various reasons.

This is a trend which continues from August and September. While only a part of the withdrawals can be explained by the subscriptions to the NTPC IPO, industry sources said corporates have withdrawn their investments because they are pumping in available cash surpluses into their own businesses.

According to Nikhil Johri, head of ABN Amro MF, "The margins from liquids and floaters is just 10-15 basis points compared with 75bp for the income schemes."

A leading player in the cement sector is reported to have slashed its exposure to mutual funds from Rs 500 crore to 80 crore, while another big multinational is believed to have informed fund managers that it is going to pull out its entire surplus of Rs 1500 crore in mutual funds.

As on September 30, 2004 the liquid assets of the top ten funds (excluding UTI MF), ranged between 57 per cent to more than 91 per cent of the total assets. In some of the smaller and medium sized funds, the proportion of liquid assets is huge.

Liquid assets with JM Mutual Fund stand at Rs 3,379 crore, which is nearly 88 per cent of its total assets, while Deutsche Mutual Fund's Rs 2,588 crore investment in liquid assets amounted to more than 89 per cent of its total asset under management.

Even a small fund house such as BoB Mutual Fund with assets of Rs 385 crore had liquid assets to the extent of around 71 per cent.

"This is frightening," said the head of a foreign fund house adding that liquid assets are extremely volatile with very little stickiness. ABN Amro, which had mopped up about Rs 900 crore in its liquid schemes, has seen a 25 per cent outflow.

"The pace of redemption has been faster than the new money coming in," says Saurabh Sonthalia, head, strategy and business development, DSP Merrill Lynch. The other reason why companies may not keep their surplus cash in MFs is that they are punting directly in the gilts market.

Debt funds seem to be almost dead at the moment. Equity assets are coming in but at a very sluggish pace. Debt assets are now just over 25 per cent for the top ten funds. Industry players said that the key to getting in good flows is to lure the high net-worth customers.

"They are the ones who are able to move between various classes of assets," an industry player said. Corporate investors stick to liquid assets and debt assets to a small extent.

Retail investors go in for debt largely and a small amount of equity. HNIs are the ones with the ability to take risks. But the problem is that HNIs are investing in equities directly.

(Additional Reporting by Nimesh Shah & Shobhana Subramanian)