The share of liquid and money market funds in the total assets under management

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(AUM) of the mutual fund industry has dropped from close to 25 per cent in April 2009 to 10 per cent in February 2010, according to the Association of Mutual Funds in India (Amfi) data.

The total AUM of the mutual fund industry at the end of February 2010 was Rs 766,869 crore. Liquid funds are short-term debt funds that can invest in debt papers of up to 91-day maturity.

Mutual fund experts say this is largely because of the Securities and Exchange Board of India (Sebi) guideline in February 1, 2009, asking liquid funds not to invest in debt papers of more than 91 days. The order came into existence from May 1, 2009.

Dhirendra Kumar, chief executive officer, Value Research, said due to the Sebi order, many funds with maturity over 91 days were categorised as ultra-short-term funds. “This lead to split in the assets once categorised in liquid funds,” he added.

The order also made liquid funds less attractive in terms of returns given by them in comparison to ultra-short-term funds, which can invest in longer-term debt papers.

K Ramanathan, head, fixed income, ING Mutual Fund, said the ultra-short-term funds with 120-150 days maturity give 100-150 basis points more return than liquid funds, which have 91-day maturity. “This lead to shift of institutional money from liquid funds to ultra-short-term funds,” he added.

However, he said the recent Sebi order asking fund houses to mark-to-market the ultra-short-term funds would again shift the balance towards liquid funds.

The valuation of papers held by ultra-short-term funds, with maturity between 91 days to 180 days, on the basis of daily weighted average market price, would increase volatility in ultra-short-term funds.