Ultra short-term money dominates MF industry size

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Interplay of debt funds and debt market players impacts performance of mutual funds the most

Mutual fund debt schemes have for much of the history of the fund industry been an enigma to a retail investor. This is not surprising given the multiple types of debt fund categories and the addition of debt-oriented hybrid funds or monthly income plans. Although equity funds too come in multiple categories such as diversified, thematic and sectoral, it is not difficult to comprehend for a retail investor that a simple equity asset class exposure can be achieved by investing in any diversified equity fund having a multi-cap focus. Investing in equities is also simple, fast and cheap for equity fund managers. All they have to do is invest in equity shares of listed companies through stock exchange brokers.

But to get a debt asset class exposure through mutual fund debt schemes is a tricky business given the element of time horizon in debt investments and the multiplicity of debt market instruments. Financial Chronicle Research Bureau decodes the characteristics of mutual fund debt schemes through statistics released regularly by the capital market regulator, Securities and Exchange Board of India, and through data from mutual fund database Capitaline NAV.

There are seven main debt fund categories: liquid funds, ultra-short term debt funds, short term income funds, income funds, gilt funds, fixed maturity plans (FMPs) and interval income funds. Except for FMPs and interval income funds which are both close-ended in nature, the rest are open-ended debt funds. Hybrid funds and monthly income plans too invest a minority or majority portion of their corpus in debt securities.

A look at the February-end assets under management profile of the five largest mutual fund houses (see chart) gives a definite indication of how dependent they are on debt funds. The biggest-sized fund house, HDFC Mutual Fund, had 30 per cent of its total AUM come from the combo category of liquid funds and ultra-short-term debt funds. These two fund categories are comprised of funds which typically invest in money-market instruments and debt securities having tenure of less than three months.

Only 10 per cent of HDFC MF's total AUM came from income funds, which is a debt fund category with the objective of investing in debt securities having maturity of more than two or three years. Another 17 per cent of its corpus was from close-ended debt schemes, FMPs and interval income funds, whose investment timeframe varies from a month to five years, depending on each scheme's stated tenure. The seven core debt fund categories together made up 62 per cent of HDFC MF's corpus. It was even higher at 70 per cent for the second-biggest mutual fund house, Reliance Mutual Fund.

For the fourth-biggest fund house, Birla Sun Life Mutual Fund, a very large chunk, 85 per cent, of its total AUM coming from the seven core debt fund categories. Among the five largest fund houses, the fifth-biggest UTI Mutual Fund had the largest portion, 34 per cent, of total AUM coming from just liquid funds and ultra short-term debt funds.

The category-wise AUM data, therefore, demonstrates that the largest players in the domestic mutual fund industry are heavily reliant on flows coming from liquid fund and ultra short-term debt fund investors. Over 95 per cent of the corpus of these two fund categories come from investments made by corporate investors, banks, institutional investors and high-networth non-retail individual investors. Thus, the largest fund houses get the strength of their size mostly from non-retail investors.

This is also evident since small-sized fund houses have a higher degree of non-debt corpus among their total AUMs. The five select small-sized ones in the chart alongside, for instance, had the seven debt fund categories contributing from as low as 12 per cent to a high of just 56 per cent.

The impact of short to long tenures of debt funds is reflected in the deployment statistics of Sebi released every month. At the end of February, for instance, of the total debt assets, Rs 7,07,524 crore, of all mutual fund schemes, 28 per cent was invested in bank deposits--22 per cent being in bank certificate of deposits (CDs) and 6 per cent being in bank fixed deposits--of tenure of less than three months. Another 5.6 per cent of the total debt AUM was deployed in commercial paper issued by non-banking financial companies.

This means one-third of the debt funds corpus in the industry was being ploughed back in the banking and financial sector, even as around one-third of the largest fund house’s total corpus was coming in via financial investors from the corporate sector, banks and non-retail HNIs. Debt investments of tenure less than three months collectively made up for 58 per cent of total debt AUM of the industry at the end of February.

The second largest chunk, 23 per cent, went to investments in debt paper of more than one year (see chart). In this tenure of one year and more, corporate debt accounted for 12.2 per cent of total debt AUM, government securities made up another 6.2 per cent and PSU (public sector units) bonds another 4.2 per cent.

Bank CDs saw the largest debt fund deployment in the two interim time ranges of three to six months and six to 12 months. The funds industry had 7.3 per cent and 11.7 per cent of total debt AUM invested 3-6 month, and 6-12 month, debt paper. Investment in 3-6 month-tenured bank CDs made up for 4.1 per cent while that in 6-12 month tenured bank CDs accounted for 7.1 per cent of total debt AUM.

Debt funds were also deployed in commercial paper to a significant extent with 18.2 per cent of total debt AUM invested in CP much of which had tenures of less than three months. The interplay between mutual fund debt schemes and the borrowers and investors among banks and companies is what impacts the size of the mutual fund industry more than any other factor. And, much of this is ultra short-term in nature.




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