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Last Updated : Nov 15, 2016 06:36 PM IST | Source: Moneycontrol.com

Demonetisation drive may infuse Rs 50,000 cr into mutual funds

MFs could get an incremental Rs 50,000 crore in the next two months by way of investments from banks, which are flush with liquidity, Business Standard reported on Tuesday.

Himadri Buch
Moneycontrol

The move to withdraw high-denomination bank notes may prove beneficial for mutual funds as it could open the floodgates for temporary inflows into the Rs 16 lakh-crore MF industry. According to estimates, MFs could get an incremental Rs 50,000 crore in the next two months by way of investments from banks, which are flush with liquidity, Business Standard reported on Tuesday.

Demonetisation is expected to improve the government's fiscal situation and ease inflation, interest rates may decline over the next one year. This would lead to investors looking at investment avenues such as mutual funds.

“People are not going to keep their money in banks at 4 percent savings interest rate. So it is definitely going to move to mutual funds, said Mahendra Jajoo, Head-Fixed Income at Mirae Asset Mutual Fund told Moneycontrol.

“With this (demonetization) move there is significant increase in the expectation that inflation will come down and therefore interest rates will also come down in due course because of the improved fiscal situation of the government. Bank will put in liquid funds and buy bond funds as they will know interest rate will come down,” Jajoo added.

According to the estimates, the total value of currencies in the Rs 500 and Rs 1,000 denominations at the end of March 2016 was about Rs 14.3 lakh crore.
Depending on the quantum of black money, anywhere between Rs 8-12 lakh could come into the banking system in the next few weeks. Of which, a small portion, estimated at about Rs 50,000 crore could flow into the bond funds and liquid schemes of mutual funds over the next two months, mutual fund officials said.

However, banks are allowed to invest up to 10 percent of their net worth in to liquid schemes so impact on flows in mutual funds will be limited.

Liquid funds invest in securities with a residual maturity of up to 91 days, primarily in money market instruments like certificate of deposits, treasury bills, and commercial papers.

Banks and companies are the major investors in liquid funds, contributing over 90 percent to the assets of these schemes. In 2011, the Reserve Bank of India (RBI) had instructed banks to limit their investments in liquid schemes to up to 10 percent of their net worth. As of October 31, liquid funds contributed Rs 2.7 lakh crore of the Rs 16 lakh crore AUM of the MF sector.

"Mutual funds will be able to garner some money from the banking system, temporarily. But the impact will be limited as banks cannot invest more than 10 percent of their net worth in liquid funds. Secondly, it remains to be seen how much of this money will come into short-term debt funds as they are slightly long-term in nature," said Dwijendra Srivastava, CIO-debt, Sundaram Mutual Fund told Business Standard.
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First Published on Nov 15, 2016 10:41 am

tags #MF News

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