An Indian 2,000 rupee banknote is arranged for a photograph in Bangkok, Thailand. (Photographer: Brent Lewin/Bloomberg)

IL&FS Crisis Spurs Biggest Monthly Outflow From Liquid Funds In A Decade

Money market schemes, used by companies to park surplus cash for the short term, saw the biggest monthly outflow in at least a decade in September as mutual funds faced redemption pressure because of defaults by Infrastructure Leasing & Financial Services Ltd. and quarter-end withdrawals.

Investors pulled out Rs 2.11 lakh crore from the liquid/money market category compared with an inflow of Rs 1.71 lakh crore in August, according to data released by Association of Mutual Funds of India. That’s the most investors withdrew in a month from such schemes since April 2007, according to Bloomberg data.

It contributed to a total outflow of Rs 2.3 lakh crore from all schemes put together compared with an inflow of Rs 1.74 lakh crore a month ago. It’s not clear what contributed to the large inflow in August and whether it had a bearing on the September outflows.

The debt and money market segments reflect the dual impact of the IL&FS imbroglio and the usual quarter-end outflows, according to Sunil Subramaniam, managing director and chief executive officer at Sundaram Mutual Fund.

Asset management companies have an exposure of Rs 2,800 crore to IL&FS, according to a Sept. 30 note by the Finance Ministry, and could set off a chain of redemptions for other non-bank lenders, pushing yields higher. To ensure the stability of the financial system, the government took control of the systemically important infrastructure group.

Equity Fund Inflows Surprise

The IL&FS crisis also triggered liquidity concerns around non-bank lenders and fears spilled over to the equity markets. The benchmark Nifty 50 fell 6.4 percent in September as volatility spiked and shares of non-banking financial services companies tumbled. Higher crude prices and a weaker rupee also hurt the sentiment. Investors shrugged off the concerns.

Inflows into equity funds rose after falling for four straight months. Net investments into such schemes jumped 33.4 percent to Rs 11,172 crore in September.

Equity flows remain robust due to continued retail participation through systematic investment plants and new fund offers, Subramaniam said. “This indicates the growing maturity of domestic investors.”

Investments into balanced funds, however, plunged 72 percent at Rs 731 crore compared with an inflow of Rs 2,630 crore in August.

“Equity plus balanced remains the same as August indicating stability. We have to see how this evolves over the next month,” Radhika Gupta, chief executive officer at Edelweiss Asset Management, said referring to the IL&FS crisis and liquidity concerns around non-bank lenders. “It’s normally a redemption month because of half year-end, but this is higher than normal.”

The outflow from income funds in September at Rs 32,504 crore was five times higher than the previous month. Such schemes are perceived to be safe because they invest in high-dividend generating stocks, government securities, certificate of deposits, corporate bonds and money-market Instruments.

The fears due to IL&FS and the Dewan Housing Finance Ltd. drawdown would have percolated into the income category as well, an executive with an asset management company said requesting anonymity. And September, the person said, may not be the last month to see such peculiar changes in the income and liquid categories.

Total assets under management of the industry declined 13 percent to Rs 22.04 lakh crore in September from a record Rs 25.2 lakh crore a month ago. Total equity assets, too, fell 7.1 percent at Rs 7.47 lakh crore against Rs 8.04 lakh crore in August.

Also read: SEBI’s New Mutual Fund Expense Norms May Hurt Close-Ended Schemes Most