RBI?s sustained injection of liquidity into the mutual fund (MF) industry has started yielding results. After the huge redemptions of September and October, the outlook for November has improved. As a result, RBI data shows that Rs 56,755 crore of the limit allocated to banks for lending to MFs and NBFCs lies unused.

RBI had opened the term repo facility to banks for lending up to Rs 60,000 crore to MFs. It had also permitted an exemption of up to 1.5% of the funds that banks needed to invest in specific securities (SLR) to create headroom.

?At the moment, the MF industry?s borrowing from commercial banks has come down drastically and is only a fraction of the amount allocated by RBI,? said AP Kurian, chairman, Association of Mutual Funds in India (Amfi).

September saw Rs 45,655 crore in net outflows from MFs and the bleeding continued in October with net outflows of Rs 46,973 crore. Faced with this redemption pressure and staring at a shortfall even after net selling debt instruments worth Rs 24,000 crore in October, the industry had to resort to bank borrowing.

Kurian said the liquidity position of the MF industry in November is far better than in October. ?We are witnessing inflows after the October meltdown and we hope that in coming days, conditions will improve,? he said.

S Srinivasa Raghavan, vice president & head-treasury at IDBI Gilts, concurred: ?The redemption pressure on MFs has now eased. Liquidity looks comfortable for now, which is why they are not borrowing heavily from the RBI window.?

The window for MFs and NBFCs is open until March and Kurien said funds would only turn to it as a last resort. He also reiterated that the industry was working closely with Sebi to publish new guidelines for fixed-maturity plans.

Speaking on the sidelines of the Indian Securities Forum in Mumbai, TC Nair, wholetime member of the Sebi board, said the markets regulator had been reviewing various aspects of the MFs industry and that no fresh guidelines were expected immediately, but probably in the next couple of weeks.

Sources in the MF industry said Sebi officials had met with key players in the industry to understand their predicament. ?How to ease the redemption pressure and see that the retail investor is not impacted by the huge redemptions was the primary agenda,? one source said.

Moving back to close-ended funds was seen as one of the most viable avenues. In the nineties, closed-ended funds were extremely popular as they had a finite time frame, after which the scheme was liquidated and the earnings distributed among unit holders. A scheme would then be listed on an exchange and investors could exit and enter through the secondary market. There would be a fixed date when the redemption window would be open for investors as well.

This way, the impact on a fund corpus would be greatly reduced as opposed to open-ended funds, which see a direct reduction in assets under management when large-scale redemptions take place.

?The fund manager can then stick to investment plans and not be forced to change them under redemption pressure, thereby protecting the interests of long-term investors,? said a fund manager.

However, the problem faced earlier was that most listed funds would trade at a huge discount to the net asset value for most months and would rise and fall when dividends were announced.

This created a disincentive for investors as they faced market risk on the investment portfolio and market risk on exit. ?This will be one of the challenges to overcome if this system is to be propounded,? concluded the fund manager.