MFs to face large redemptions from banks


MFs to face large redemptions from banks
Bangalore: Mutual funds (MFs) are likely to face large redemptions from banks, which figure among the big ticket investors. Most of the banks are planning to pull out money amid concerns that returns from liquid schemes could dip further. Fund houses think that such redemptions could start from August end. As part of the new rules that followed last year's money market crisis, the capital market regulator Securities and Exchange Board of India (SEBI) had restricted MFs from investing liquid plan funds in instruments with maturities beyond 90 days. Since the new regulation became effective in June, the return on liquid plans has fallen from five percent annually to 3.5 percent in the first quarter. Till now banks often parked their surplus fund in liquid schemes which generated a better return than other comparable short-term instruments. As on June 30, banks had outstanding investments of over 1.20 lakh crore in such schemes. This will change now, since most banks feel that the investment restriction will impact MFs ability to generate a better return. "Substantial amount of money being parked in liquid plans is a trend that is not going to last for long. SEBI norm will drive banks to find ways to lend more to the manufacturing sector," said M V Nair, Chief Managing Director, Union Bank of India. Nair, who is also the Chairman of Indian Banks' Association (IBA) said, "We expect credit to pick up in the second half of this year. We are receiving more loan proposals." In a move to minimize mismatches and liquidity crunch, SEBI told MFs in May that maturity of securities cannot exceed that of the scheme. While the funds started rejigging their investments from June, the full impact on the scheme returns would be felt only in September by when most of the long dated, high yielding papers would mature. Ritesh Jain, Head of fixed income, Canara Robeco Mutual, thinks that while the possible impact on liquid schemes have been factored in, liquid plus plans-the ultra short term plans may also face the heat. Ultra short term plans have more leeway in investing in structured and longer tenure assets which enable them deliver a better return.