Managers of short-term debt mutual fund (MF), especially liquid schemes, are faced with a problem of plenty. Such funds are inundated with investments from banks which have suddenly found themselves no-where to lend in the short-term, reports - The Economic Times.

This is because the overnight call rate — the rate at which banks borrow from each other — is at near-zero levels, thanks to cap on the amount that banks can park with RBI. This has resulted in a temporary surplus in the banking system. Though fund officials are reluctant to absorb all the money in their liquid schemes — as it will depress returns in the near-term — they find it difficult to refuse large institutional clients.

“We are finding it difficult to turn away any client because this is a short-term issue. Even though it might impact returns in the short-term, we are trying to accommodate as much (inflow) as possible,” said a debt fund manager with a domestic mutual fund. Fund officials said fresh inflows could result in further fall in returns in liquid funds to around 4-5% from 6-7% currently.

Inter-bank call rates are expected to shoot up to their normal levels of 6-8% next week, as surplus cash in the system is expected to be mopped up by the government borrowing programme and advance tax payouts by corporates.

The dilemma for fund managers is where to ‘park’ all the excess money. The rates in the call market, where MFs invest short-term money, is around 0.02-0.05%, while the MIBOR (inter-bank) rates are at 0.3-0.4%. So if the money is parked in the overnight market, these funds will fetch negative returns (including investment expenses.)

Alternatively, fund houses have been investing in short-term papers such as certificate of deposit (CD) and commercial paper (CP) for the moment for better returns. But, the problem here is that returns from CBLO market is expected to exceed that of CDs and CPs next week.

“In case, funds invest in CDs and CPs now, there is a good chance we may have to book losses in them next week,” said DBS Chola AMC’s head of fixed income Ashish Nigam. CPs are short-term money market instruments issued by companies and non-banking finance companies, while CDs are issues by commercial banks .

Mr Nigam said his fund house has not been investing most of the inflows anywhere, and is sitting on cash. RBI’s bonds issuance is expected to suck out close to Rs 30,000 crore over the next few days, while advance tax payments would amount to roughly Rs 20,000-25,000 crore. 

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