The lure of high returns is no more driving companies looking for investment opportunities for their surplus cash. The flight of money from fixed maturity plans (FMPs) of fund houses in October this year has taught corporates?key investors in these schemes?a lesson or two. Safety comes first. Many companies are now choosing to park their excess funds in bank deposits instead.

It?s not without reason. Bulk deposit rates are still quite attractive at about 10.5% when retail deposit rates are falling by a few basis points to about 9.5-10%. Bulk deposit rates too, say observers, could be revised downwards in the near term as the Reserve Bank of India readies itself for a new round of rate cuts.

Till that time, though, companies continue to take advantage of the avenue available to them to manage their surplus cash. By some accounts, the corporate sector has contributed almost 40% to the overall deposit growth witnessed by banks in the last few months.

This trend, say observers, is likely to go on till bulk deposit rates continue to be attractive enough for companies to invest. ?I don?t see any other avenue where this surplus cash can go,? says Allen C A Pereira, chairman & managing director, Bank of Maharashtra. This point is reiterated by the chairman & managing director of Chennai-based Indian Bank, M S Sundara Rajan. He says, ?The beneficiary of this surplus cash will be the banking system.?

Why bulk deposit rates are attractive is not difficult to gauge. As lending rates, mainly of public sector banks, fell on account of the cut in the cash reverse ratio, statutory liquidity ratio and the repo rate brought about by the RBI recently, deposit rates remained firm. A key reason for this, says Ashish Agarwal, director, A K Capital, a leading bond house, is on account of the cost of financing that has fallen in proportion to the rate cuts effected by the central bank. ?Therefore, it doesn?t pinch banks so much when they bring their lending rates down but not their deposit rates,? he says.

Banks have actually been shoring up their funds with this deposit mobilisation in the wake of the financial meltdown. But this is not likely to last as a new round of rate cuts meant to stimulate credit growth is likely to be announced by the central bank shortly.

The focus of the apex bank, say observers, is on boosting demand by making loans attractive to customers. Naturally, lending and deposit rates have to fall for this. Till that time though companies are making the best of what they have.

Says Prashant Pai, chief financial officer, Kansai Nerolac, ?Till some clarity comes, I think depositing with public sector banks is the best bet.? Adds V Kumaraswamy, chief financial officer, J K Paper Ltd, ?It is a safe avenue at the end of the day.?

But for all the attention on bank deposits, debt funds offered by fund houses have not lost flavour altogether, say observers. Companies continue to park their monies in these schemes, mostly in those that have a short tenure. Of course, they are doing it cautiously.

Take Kansai Nerolac?s investment portfolio, for instance. Only one-fourth of the portfolio has been invested in bank deposits, the balance has been invested in liquid funds and FMPs with a maturity of about a year. ?But I?ve made sure that the underlying exposure of the instruments in these funds is sound. They are not exposed to risky sectors,? says Pai.

Take another example of Mastek Ltd. The IT company?s cash surplus has been invested in FMPs, liquid plus and liquid funds. ?FMPs constitute a small portion,? says Rangachari

Desican, chief financial officer, Mastek Ltd. ?The bulk of our investments are in liquid plus and liquid funds.

Our objective is to try and match the maturity of our schemes with our internal requirements. Schemes with a shorter tenure fit the bill. We also make sure the underlying investment instruments are not risky or exposed to risky sectors.?

It was the exposure to ?risky sectors? such as real estate and finance that set off the redemption wave in fixed maturity plans in October. The net outflow from these schemes in October was Rs 52,820 crore, according to data from the Association of Mutual Funds in India (AMFI).

By some accounts, the redemption pressure actually began a month earlier in September with the flight of capital being to the tune of Rs 26,665 crore. There has been some improvement in the situation in the month of November, say mutual fund executives, but companies in general are a bit wary as liquidity continues to be a concern in these tough times. ?It will take some time for the situation to be restored,? says an executive with a fund house.Fixed maturity plans though essentially debt funds operate like quasi fixed deposits. An investor cannot get out of the fund much like he can?t in the case of a fixed deposit with a bank. However, if he does decide to exist, it is treated as a premature withdrawal. Liquid funds, liquid plus and short-term funds, in contrast, are schemes where an investor can come out easily on account of their short tenure. Liquid funds, for instance, can have a tenure of a day. Generally investors with a profile of about 30-45 days go in for liquid funds. Liquid plus and short-term funds, in comparison, are longer in duration exceeding six months.

Companies choose to take the fund route to park their monies simply because it is easy and convenient for them to do so. There are tax benefits too that are associated with it. But in these times of economic slowdown, the pressure on fund houses to park corporate money safely is growing.

Says Rajiv Deep Bajaj, managing director, Bajaj Capital Ltd, a distributor of financial products, ?Much depends on the call on interest rates taken by the fund house. As such they have become cautious.? Aiding fund houses in this endeavour are new guidelines being proposed by the

Securities and Exchange Board of India (SEBI) for investments in debt schemes. In its board meeting recently, the market regulator decided that the maturity of the underlying assets or instruments in close-ended schemes (like FMPs) will not exceed the maturity of the scheme itself. This then is likely to eliminate the mismatch in the maturity of the underlying instrument and the scheme in question. Also, premature withdrawals by investors will not be permitted. Naturally, this will take a huge load off the fund house, but may not make the investor too happy since the option of premature withdrawal permitted him to exit the fund even at a loss.

During the redemption wave in October, for instance, fund houses got some respite when the central bank decided to provide a temporary credit line of Rs 20,000 crore to them to bridge the gap between redemption requests and the sale of underlying assets or securities. But the practice of giving indicative yields of the underlying securities in which funds have been parked is likely to be discontinued.

As such, certificate of deposits issued by banks as well as short-dated treasury bills are being picked up as underlying investment instruments by fund houses these days even as the appetite for commercial paper seems to be lost.

Sample this: According to data available with the Clearing Corporation of India Ltd (CCIL) from November 19 to December 1, 2008, the pickup of treasury bills by mutual funds was over 30%, going up to about 61.03% on November 26. It came down marginally to about 52.22% on December 1, but was still over the 50% mark.

Why the increased activity of mutual funds gains importance is because this space is normally dominated by banks. They are the ones who pick up treasury bills more than any other market participant does. However, mutual funds? rush for T-bills indicates their need for safer and liquid instruments to park corporate money, says a banker based in Mumbai.

As the government signals a rate cut, there is a subtle shift happening in the yield curve. If the short-end of the yield curve was higher than the long-end so far, that?s changing now as the market waits in anticipation for the central bank to slash key rates. 91-day-T-bills, for instance, have moved from yield levels of about 10-12% a few months ago to about 6.60% now. CDs of 3-12 months, on the other hand, are hovering in the range of 9-10%. Call money rates have also dropped substantially on account of the liquidity in the system. From a high of about 23% in September-October, call money rates are down to about 6.25-6.5% levels.

The action is slowly shifting to the long-end of the yield curve, where a 10-year, triple A rated corporate bond, for instance, has an yield of about 10.75-11% as of now. Fund houses are responding to this dynamic by urging investors to think long rather than short.

?As the long-end of the yield curve improves, it means the latter is turning positive. This is in contrast to the scenario earlier when the curve was negative since the short-end was higher than the long-end. This is a good sign because the yield spread between the long and short ends now will widen,? says a banker based in Delhi. It would also mean that investors, especially corporate investors, would have to stay put in debt funds a little longer than they now are. The question is: Are they prepared to do that?