With the stock market tottering, corporate investors have started withdrawing their funds from liquid mutual funds and are investing in short-term bank fixed deposits, which have emerged as an attractive alternative. Retail investors are also expected to follow suit as long-term fixed deposit rates are firming up.
According to the Association of Mutual Funds in India (AMFI), mutual funds lost Rs 58,349 crore of business in March 2007, bringing the industry-wide assets under management below Rs 3,00,000 crore. The flight of funds from liquid mutual funds to fixed deposits in March was primarily due to the incentives offered by the banks to attract bulk deposits, to plug the gap between assets and liabilities before the end of the financial year on March 31.
“This is only the beginning of the flight of funds from other sources to fixed deposits, given their risk-free nature and the high interest rates offered,” said Avinash Gorakshakar, research head at Emkay Shares. Banks are expected to offer higher interest rates in advance if they anticipate another major hike in rates by the Reserve Bank of India.
“Though the exact amount of funds cannot be ascertained, small private sector banks and foreign banks, which were unprepared for tight liquidity, had a tough time raising funds,” said Devendra Nevgi, fund manager with Quantum Mutual.
Tight liquidity and banks offering higher rates are common at the year-end. But the rates this year were on the higher side, Nevgi said, adding that he had seen some banks offering 12-19 per cent interest on deposits of 7-15 days. However, he was not ready to disclose names.
“A diversion of investment by big investors, companies and institutions from equities and mutual funds was seen during the last fortnight to short-term fixed deposits of banks, which are in need of funds,” said Sandeep Jain, vice-President (private client group), Ambit Capital.
Another broker, who wished not to be named, said a multinational bank had offered up to 26 per cent interest on some short-term loans. Public sector banks were not involved in this exercise to that extent.
Short-term requirements of banks during the year-end typically range from 7 days to 29 days. This time, some banks have sought funds for longer. It is based more on the mismatch in their assets and liabilities. The end of the financial year usually sees liquidity drying up due to advance tax payments by corporates and banks scrambling for cash deposits.