Last month, the mutual fund industry witnessed the steepest fall in assets under management (AUM) ever since October 2008. The total AUM in June 2010 dipped by Rs 1,27,624 crore, a decline of 15.8 per cent over the previous month. This was the highest ever month-on-month decline in absolute terms that the fund industry has witnessed since inception. In percentage terms it is the second-highest fall, the highest being (-)18.37 per cent in October 2008.
Among the various fund categories, the liquid-plus funds witnessed the highest decline - 33.90 per cent of AUM.
Should these statistics worry you? No.
Here's why:
The past
In October 2008, debt funds were worst hit with net outflows of around Rs 52,820 crore. Fixed Maturity Plans (FMPs) and liquid-plus funds had accounted for most of the outflows then. Cash-strapped corporates redeemed most heavily from FMP portfolios: their AUM declined by Rs 75,764 crore. That of liquid funds by Rs 26,799 crore (compared to the previous month - September 2008).
The October 2008 outflows were panic driven and were also the result of an asset-liability mismatch in FMPs. Those days investors could get out of FMPs at any point of time, but the underlying assets were not liquid enough to enable them fund houses to honour large redemptions. So when corporates withdrew large sums, a liquidity crisis ensued.
After the crisis, the market regulator, Securities and Exchange Board of India (SEBI), fixed this problem by mandating the listing of new FMPs. They were also barred from investing in papers with maturity higher than that of the scheme.
The present
Between October 2008 and April 2010, AUMs of liquid-plus schemes have grown significantly - by Rs 2,13,639 crore. But since May the momentum in their AUM growth has vanished. The income fund category (which currently make up close to one-third of the industry's AUM) saw the highest net outflows of Rs 35,084 crore in May. This large outflow occurred due to the high payout of Rs 67,718 crore that had to be made to the government in the wake of the 3G and wireless broadband auctions. It led corporates to withdraw the money they had parked with mutual funds.
In June, income funds again saw the highest net outflows of Rs 1,34,354 crore. The open-ended income funds category (preferably known as liquid plus) witnessed net outflows of Rs 1,48,358 crore (much higher than the net outflow of Rs 33,169 crore in October 2008). This time the outflows occurred due to two reasons: withdrawals due to fear of unpredictable returns from short-term debt and money market instruments on account of the new valuation norms (to be introduced from August 1, 2010); and the first instalment of advance tax.
Although the magnitude of the June 2010 decline was higher than that of October 2008, panic hasn't set in, as had happened then. According to Chaitanya Pande, Co-head - Fixed Income, ICICI Prudential AMC, “The current decline in AUM was basically on account of higher-than-expected 3G auction payout. Such outflows are temporary in nature. There are no credit concerns in the present scenario as was the case in October 2008.”
As for when the industry's AUM will recover, he is of the opinion that “the mutual fund industry's AUM has seen some recovery in the last couple of weeks and is expected to improve gradually as liquidity returns.”
The future
What will happen when the new mark-to-market debt valuation norms come into force on August 1, 2010? Would it lead to flight of money? Fund houses plan to charge an exit load on early redemptions from some of these schemes to deter premature withdrawals. The feeling by and large is that while the exit load may not be appreciated by corporates, once the dust settles, it will become an accepted norm and they will continue to park their money in these schemes.
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