Liquid funds may slow returns if call rates dip

Mumbai, May 30 | Updated: May 31 2007, 05:30am hrs
Liquid and money market schemes offered by mutual funds (MFs) may witness a deceleration in their returns, if the drastic fall in overnight call rates and the short-term corporate yields continue to slip southward.

Sandeep Bagla, head-fixed income, Principal Pnb Asset Management Company (AMC), said, Liquid and money market schemes invest in instruments having short-term period like treasury bills, commercial paper, call money and repos. However, the overnight call rates and the short-term corporate yield has gone down drastically by almost 150 basis points in the recent past. If this fall continues for some more time then the returns from liquid funds and newly launched fixed maturity plans (FMPs) may witness a dip in their returns.

The overnight call money rate closed at 1% down from 3.5% on Tuesday, falling below the Reserve Bank of India (RBI) borrowing or reverse repo rate of 6%, for the second time in the last one month. Echoing similar views MF experts opine that the returns from the cash funds, which were virtually available for free, may slow down if this dip is sustains for a longer period.

Dhirendra Kumar, CEO, Value Research, said, Easy days for liquid funds and cash funds offered by MFs could be nearing a hibernation period if the dip in the overnight call money rate continues.

He further said that the returns from the long-term papers may come down. Change in one or two days call rates may not affect the returns, but returns from long-term papers may surely slip, he said.

According to the Association of Mutual Funds in India (Amfi) data as of last month (April 2007) liquid and money market schemes constituted around 23% of the total asset under management (AUM) of the MF industry. The total AUM of these schemes was at Rs 79,936 crore.

The average returns of these schemes during the last 6 months have been around 3.94% whereas the returns from same fund have dipped to 0.68% in the last one-month.