The liquidity crisis in short-term debt funds has roiled the mutual fund industry. Anil Kumar, chief executive officer of Birla Sun Life Mutual Fund, spoke to Suneeti Ahuja on the likely impact of the crisis
The liquidity crisis in short-term debt funds has roiled the mutual fund industry (as our columnists point out elsewhere in this issue) and left investors shaken. Anil Kumar, chief executive officer of Birla Sun Life Mutual Fund, spoke to our correspondent on the likely impact of the crisis. He expressed confidence that the measures taken by the regulators to inject liquidity will be able to contain the crisis.

There is a liquidity crunch in the global markets. How is it affecting the Indian mutual fund industry?
There are liquidity-related issues all over the world. As the mutual fund industry is a part of the financial sector market ? which includes banks, corporates, mutual funds and non-banking financial companies ? we too are affected. Basically, banks have tightened liquidity. They used to invest in our liquid funds but have pulled out money of late.
Secondly, given that short-term interest rates have shot up, corporates are unable to borrow from banks at such high rates. To meet their working capital needs corporates started pulling money from liquid and liquid plus funds, and from the bank deposits they maintained. This has led to higher redemption in the mutual fund industry.
Mutual funds maintain some amount of cash to meet redemption needs. Due to seasonal factors, like the quarter ends, for tax outflows and banks’ requirements, money gets pulled out. Mutual funds generally invest in such a fashion that they are able to meet such requirements. They keep some contingency reserves too. But if there is a prolonged spell of redemptions, this will certainly led to a liquidity crunch.

Are the measures taken by RBI and Sebi enough to contain the liquidity crisis?
I think to a large extent Sebi and the central bank have addressed the issue with the 250 basis points CRR reduction last week and measures announced for the mutual fund industry.
Mutual funds are an important participant in the financial industry. They have about Rs 3,00,000 crore worth of debt instruments and are active traders in the debt markets. If that market dries up, we will definitely get affected. So RBI has opened up the liquidity window for mutual funds as well.
I think the regulators have been timely, decisive, and proactive. Sebi has taken into account Amfi’s and the mutual fund industry’s concerns. They have taken a lot of data from the industry and are constantly monitoring the situation.
Till now the problem has been taken care of. We have also been assured that if the situation does not improve, we will be granted more help from the regulators and the government.

How much redemption has your mutual fund house faced till date?
Redemptions, as you are aware, have been on the higher side across the board. We’ve been able to manage redemptions quite well. Having a fairly large book has helped, as we have higher cash and cash-like assets to meet these pressures. Of late, owing to increased liquidity in the system, we’ve even seen inflows coming in.

ABN AMRO and Mirae AMC are learnt to have put restrictions on the scale of redemptions allowed by institutional investors. Will you also resort to such measures?
So far we have met all our redemption requirements. We have fairly adequate liquidity in our portfolio, so we haven’t taken any such steps.

Has Birla SunLife Mutual Fund sought access to the special liquidity window?
So far, we haven’t accessed it but we are talking to banks to set up the lines. If the need arises, we would probably use that window. I’m sure even other mutual funds are doing the same.

You have launched ELDs and fixed maturity plans (FMPs). What next?
It will all depend on market conditions and how things pan out. At the moment, people are looking for diversification, liquidity and safety. Keeping this in mind, we are looking at short-term funds that invest in a basket of bank certificates of deposit (CDs). We have a portfolio wherein there are CDs of multiple banks, and exposure to any one bank is not more than 7-8 per cent. The product insures a higher level of safety and liquidity and is attracting a lot of attention from retail as well as institutional investors. They also give investors good post-tax returns compared with a fixed deposit.

Of late, FMPs had come under the scanner because of the liquidity mismatch between them and their underlying securities, and also because of the lack of transparency in their portfolios. What disclosure norms do you follow?
We give an indicative portfolio to clients. And once the FMP closes we give our investors the actual portfolio. It is institutional investors who invest in short-term funds, while retail clients are more in long-term FMPs.

What is the total assets under management (AUM) of your fund house? And how much of this amount is invested in debt instruments and how much is in equities.
As on September 30, our total AUM stood at Rs 37,200 crore. Of this, roughly 75 per cent is in debt instruments and 25 per cent in equity. For the industry, 65 per cent of investments are in debt and 35 per cent are in equities.

Mutual fund houses like yours have been allowed to sell insurance with your products. Is it an interim decision?
As of now, we have been instructed by Sebi that the insurance companies have decided to continue giving mutual funds the cover to bundle it or wrap it up with their products. I don’t know whether it is an interim decision or not. But we have been told that we can continue and offer such products to our customers without any issues.

What happens in case a customer has any grievance? Does he go to the insurance company or come to the mutual fund house to settle these issues?
Since the mutual fund is the company that the customer is dealing with, we are the ones the investor will come to. In case of any grievance, we will sort out the issue. This is standard practice in all insurance-wrapped products. For instance, in case of insurance wrapped around loans or credit cards, the bank sorts out the issues with the customer.

The Indian mutual fund industry has been growing at an annual rate of 22 per cent for the last 10 years. In fact, it grew by as much as 60 per cent last year. What is the status now?
The industry, as on September 30, was largely stagnant. There was negative growth of .2 to .3 per cent compared with March levels. In our case, we grew 5 per cent during the first half of this year.
As you know, we have had issues during the first half of the year. The markets have put off investors. Given the high interest rate and tight liquidity scenario, there will be times when we have slow or negative growth. But we are confident that the mutual fund industry, which has a penetration level of 4-5 per cent of total household savings, has a long way to go. Given that the industry is growing at a fast pace and penetration is still low, it is a great combination and is conducive to the overall growth of the industry.

What would your advice to retail investors be in such volatile times?
We have always said to our investors that time in the market is more important than timing the market. We don’t know when the markets will be up, or down, or where is the bottom, or when is the right time to invest. But if you are a long-term investor, are fairly diversified, and invest systematically in the market through an SIP, then over the long term you are likely to get good returns.
An investor should have a long-term horizon. He should understand that there will be volatility and ups and downs in the market. There have been times when the markets have come down by more than 30-40 per cent. At the same time they have also gone up and given good returns to patient investors.