After the recent default of IL&FS, which hit the liquid schemes of fund houses, the mutual fund houses are now turning to launch overnight funds— less risky than liquid funds.
Typically, large corporates 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.
In the week that went by, 4 fund houses — IDFC Mutual Fund, Reliance Mutual Fund, DSP Mutual Fund, DSP Mutual Fund — have sought the Securities and Exchange Board of India’s approval to launch Overnight Funds.
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.
“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.
In the last one year, overnight funds have delivered 5.5-6.5 percent average return, while liquid funds gave 6.77 percent during the same period.
Mutual fund experts said that 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.
In October, the AUM of overnight funds rose to Rs 12,200 crore from Rs 3,890 crore in September.
The existing overnight schemes — HDFC Overnight Fund’s AUM went up three-times to Rs 9,200, while the L&T Cash Fund saw its AUM surge more than 1.5 times to Rs 680.
In terms of gains, UTI Overnight Fund stood in the numero uno position with its AUM surging 11 fold to Rs 640 crore, from a lower base of Rs 58 crore in September.
Investors have become extra cautious after IL&FS default. IL&FS and its subsidiaries were found in the portfolios of liquid funds which led to sharp falls in the NAVs of these funds.
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, a record Rs 2.1 trillion worth of outflows were witnessed in liquid and money market schemes in September.
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