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In a high liquidity market post demonetisation, both equity and debt mutual funds witnessed unprecedented inflows, showing signs of risks increasing from banks to mutual funds, according to a report by the Reserve Bank of India.
“Given the significant increase in the mutual funds’ (MFs) corpus and an excess monthly return of almost 250 bps (annualised) from a representative money market fund over the Clearing Corporation of India Ltd.(CCIL) liquid T-bill benchmark, there seems to be some risk migration from the banks to the mutual funds,” the financial stability report released on Thursday said.
Mutual funds as an asset class seem to be entering the maturity phase in India with broad- basing of investors and geographical spread. Assets under management (AUM) increased from Rs 17.55 trillion in March 2017 to Rs 20.40 trillion in September 2017, the report highlighted.
After banks, asset management companies managing mutual funds (AMC-MFs) were the second largest players at around 15 percent of bilateral exposure in the financial system.
The top-5 fund houses contributed approximately 50 percent of the aggregate corpus of liquid and money market mutual funds (MMMFs).
The report also added that diversity in terms of the investor base will provide resilience against redemption pressures in case the markets see corrections in their valuations.
“AUM of B-15 cities grew 230 percent in 2016-17 of what it was in 2012-13. Further, the share of individual holdings in mutual funds’ AUM has increased from 46 percent in April 2016 to 51 percent by September 2017, while the share of holdings by institutions (corporates and banks) went down from 54 percent to 49 percent during the same period.
Contributions to mutual funds through systematic investment plans (SIPs) has added further stability to this sector. While the number of outstanding SIPs has continuously increased from 6 million in 2013-14 to 16.5 million in July 2017, the number of premature terminations came down from 1.9 million to 0.6 million during the same period.
Another manifestation of the swelling MF corpus and consequent investment in corporate bonds is a gradual contraction in higher rated corporate bond spreads.
According to the report, the risk appetite in foreign portfolio investors for unhedged government and corporate bond exposure has increased. The recent upgrade in India’s sovereign rating by Moody’s implies that Indian corporates’ dollar borrowing cost is likely to remain benign, it said.
However, the offshore market could be pushing down risk towards the local markets, it observed.
“The significant build up in offshore index futures relative to onshore can have spillover effects to related onshore markets during times of stress,” the report added.
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