Date:10/05/2006 URL: http://www.thehindubusinessline.com/2006/05/10/stories/2006051004370600.htm

Back MFs find CDs, bank bulk deposits attractive

C. Shivkumar

Liquid funds account for 36 pc of AUM

Why the preference
Banks offer rates higher than 8 per cent.
Fears of depreciation losses on existing bond investments as yields harden.
KEEN ON liquid investments with attractive returns.

Bangalore , May 9

Mutual funds have begun parking funds in certificates of deposits and bulk bank deposits in a bid to boost returns.

So far only money market mutual funds were investors in CDs. However, some open-ended balanced funds have also begun parking in bulk deposits of public sector banks and CDs. In January, 33 per cent of the assets under management (AUM) of all the mutual funds were in liquid funds that included CDs/bulk deposits. This was about Rs 72,000 crore. By April, the figure had increased to 36 per cent or about Rs 85,000 crore.

Bankers said one of the major reasons for the interest in CDs of banks was the high returns on offer. Banks, in a rush to mop up deposits, are offering rates in excess of 8 per cent on CDs or bulk deposits depending on the tenure.

Most of the resources are parked for 46 days but rolled over. Between the two, the preference was overwhelmingly weighted in favour of bulk deposits, bankers said. This was on account of stamp duty exemptions. Stamp duty does not apply to bulk deposits. Consequently, bankers find bulk deposits a cheaper source, especially considering that both these sources are eligible for both CRR and SLR.

The bankers said, the shift to CDs and bulk deposits was also on account of the fears of depreciation losses on their existing fixed income investments, government securities, public sector bonds, corporate debt and mortgage backed securities. Most of the funds have picked up these securities, especially the securities during a low interest regime. But in the current regime, when interest rates were on ascent, these papers are expected to face large depreciation. Ten-year yields have firmed by at least 150 basis points over the last one-year.

Accordingly, bankers said, the preference was increasingly in favour of papers/securities that were liquid and offered attractive returns. CDs and bulk deposits fitted the criteria.

But fund managers said the Securities Exchange Board of India does encourage parking funds in bulk deposits. Therefore while the banks preferred to have more in the form of bulk deposits, MFs were perforce made to park in CDs, they added.

In addition to CDs, mutual funds during the last few weeks have also been active in the collateralised borrowing and lending markets, mostly as lenders.

In fact, during March, several mutual funds capitalised on the tight liquidity situation, lending overnight funds to banks against government securities as collateral.

T-bill auctions

In addition, funds have also remained active in the short-term money markets especially in placing bids for 91-day Treasury bills. MFs' participation, the sources said, was one of the major factors for keeping the weighted average yields in the T-bill auctions below the cut-off yields.