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Last Updated : Mar 15, 2019 04:14 PM IST | Source:

IL&FS fallout: MFs junk liquid funds, roll out overnight schemes

In the last one year, overnight funds have delivered 5.5-6.5 percent average return, while liquid funds gave 6.92 percent.

Himadri Buch @himadribuch

After the default of IL&FS hit liquid schemes, mutual fund houses are turning toward overnight funds that prove to be less risky.

Over the last six months, since the IL&FS crisis surfaced, 16 fund houses have sought the Securities and Exchange Board of India’s approval to launch overnight funds.

These fund houses include — Yes Mutual Fund, Edelweiss Mutual Fund, HSBC Mutual Fund, Tata Mutual Fund, DHFL Mutual Fund, Mahindra Mutual Fund, BNP Paribas Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund, DSP Mutual Fund, Reliance Mutual Fund, and IDFC Mutual Fund, among others.


Typically, large companies park their surplus funds in liquid schemes, which invest in commercial papers. Generally, investments in commercial papers are safe but sometimes they are subject to default if companies fail to make a timely interest payment or principal repayment leading to credit rating downgrades.

ICICI Prudential Mutual Fund and Aditya Birla Sun Life Mutual Fund have already launched their overnight funds.

Overnight funds invest its assets in CBLO (collateralised borrowing and lending obligations) and repo/reverse repo instruments that mature in one day, while liquid funds invest in treasury bills, commercial paper and certificate of deposit that have a maturity up to 91 days.

Overnight funds expose investors neither to credit risk nor duration risk but yield paltry returns of about 6.4 percent. Liquid funds do slightly better.

“The negative impact on net asset value on few liquid funds after the IL&FS fiasco has raised a question on how safe liquid funds are so to counter this problem, SEBI is encouraging overnight funds, which put money in overnight securities having maturity of just one day,” said a fund manager from a private fund house.

“Fund houses are coming up with funds in the overnight category for the risk-averse investors, for whom capital safety is prime even if it comes with a bit lower return,” he added.

Why overnight funds?

In the last one year, overnight funds have delivered 5.5-6.5 percent average return, while liquid funds gave 6.92 percent during the same period.

Mutual fund experts said the rate of return on overnight securities may be lower than that of the instruments having 91-day duration, but overnight funds will provide better capital protection.

Investors have become extra cautious after IL&FS default surfaced in September 2018. The presence of IL&FS and its subsidiaries in the portfolios of liquid funds led to a sharp fall in their NAVs.

Back then, the firm and some of its subsidiaries' credit ratings were downgraded. Debt funds that had invested in these scrips got impacted. Some fund houses that had invested in these scrips took a hit as they wrote down their investments resulting in a fall in net asset values.

Investors were caught off-guard by the overnight drop in the net asset values (NAV) of these schemes. Those who panicked and withdrew had to do so at a loss.

In the IL&FS saga, some schemes lost as much as 5 percent in a single day, wiping out half a year’s worth of gains. A few schemes wrote off the IL&FS exposure completely, resulting in the NAV taking a hit to that extent. A slew of schemes faced heavy redemptions in the wake of the default.

According to the Association of Mutual Funds India (AMFI), a record Rs 2.1 lakh crore worth of outflows was witnessed in liquid and money market schemes in September.

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First Published on Mar 15, 2019 04:14 pm
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