How Much Are You Paying Mutual Funds in Commissions?

18 comments Written on November 6th, 2013 by
Categories: MutualFunds
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A question on Ask Capital Mind goes like this:

Is there any link from which I can get to know the Trailing commission which the AMC pays to the distributor?

The one simple way to find out what it costs you in commissions is to check the mutual funds’ direct plan versus the regular plan. Check only the growth options because dividends distort the NAVs since the payouts could happen at different times.

Here's a quick comparison of a few funds mentioned in that question:




  • Since Direct plans were introduced on Jan 1, we don’t have a full year to compare. I have taken the values on Jan 15 (some funds took a few days to create such their direct plans) and compared them to the November 5 value. (Approximately 10 days short of 10 months)
  • The first two funds are ultra-short term plans, which is why the difference as a percentage is small. But you would typically invest a lot more in a debt fund than an equity fund, unless you were a trader. An ultra short term plan could be used to hold emergency funds, be an alternative to longer term fixed deposits, and so on.

Think of the last column as : what am I paying my agent?

Ultra short term debt funds in general pay lesser commissions. However, you might find larger differences in longer term bond funds, dynamic funds, and hybrid funds.

Equity funds have around 0.5% difference in 10 months, which is quite a big difference. For a Rs. 10 lakh portfolio (Rs. 1 million) you are paying Rs. 5,000 in commissions!

Completely tangential: Noticed how the mid-cap funds have delivered negative returns, even though the Nifty has had a positive year till date? That’s how tough this market is.

Big investors, says LiveMint, have figured this out and have moved most of their money to direct funds. It makes complete sense to do this for corporate treasuries, for who the difference could be in crores (for JM Money Manager super, for instance, a Rs. 100 cr. maintained over 10 months sees a difference of Rs. 1.61 crores!)

The other thing is that a financial controller or board member could easily use a commission agent and get kickbacks for investing large amounts. It would make more sense for corporates, especially listed ones, to move their money into direct plans.

Typically the industry has had an implicit subsidy. Rich investors used to have to pay commissions (trailing fees) on their investments, and those commissions would feed agents who could then afford to lose money on the smaller investors (through more detailed hand-holding, education, running around to fill forms etc.). Now that subsidy is gone, because the rich investors are closing down their accounts and going direct.

Mutual fund distributors are either going to have to stop doing business, or attempt to charge investors directly; and I believe investors have to learn to pay, or learn to do things by themselves. Without the implicit subsidy, we don’t have easy choices anymore.

Video: Liquid and Ultra Short Term funds, and Fixed Deposits

1 Comment » Written on October 18th, 2013 by
Categories: FixedIncome, MutualFunds, Video

Some of you have talked about Liquid and Ultra Short Term funds, versus fixed deposits, and how to compare all of them:

Here’s a video that I’d made at MarketVision a long time back which might be relevant:

Certain minor things might have changed - like the Dividend taxes on ultra-short term funds have now been upped to 25% as well, so that advantage over liquid funds has gone away. But the concepts remain useful to investors today.

Liquid Funds Recover From the July 15 Damage

2 comments Written on August 5th, 2013 by
Categories: Gilts, MutualFunds

Liquid Funds have recovered substantially from their fall on July 16. Remember, on July 15, the RBI took extraordinary measures to cut liquidity and that raised short term interest rates by 300 bps (3%). This caused liquid funds to fall in their NAV, as short term funds were impacted by rising yields (yields move inversely with prices).

At the time there was a fear that these funds have a major problem. However, my view has been that if you don’t need the liquidity, stick around. The NAV will recover, and it has. Here’s the NAVs of all liquid funds since then, and the return from July 15.

Fund Aug-04 Jul-15 From Jul-15 Jul-16 Jul-16 Move
Pramerica Liquid Fund  1001.472 1001.4746 0.00% 999.6694 -0.18%
ING Liquid Fund 24.7574 24.7486 0.04% 24.6638 -0.34%
DWS Insta Cash Plus Fund 19.8389 19.8131 0.13% 19.7611 -0.26%
Kotak Liquid 2269.528 2266.0098 0.16% 2260.2502 -0.25%
IDBI Liquid Fund 1291.702 1289.6532 0.16% 1287.0052 -0.21%
Quantum Liquid Fund 17.0102 16.9781 0.19% 16.9308 -0.28%
L&T Liquid Fund  1652.147 1649.0143 0.19% 1644.7143 -0.26%
UTI-  Liquid Fund-Cash Plan 1910.616 1906.8792 0.20% 1903.0043 -0.20%
Taurus Liquid Fund 1564.906 1561.726 0.20% 1558.4587 -0.21%
HDFC Cash Management Fund  25.1652 25.1135 0.21% 25.0565 -0.23%
Baroda Pioneer Liquid Fund 1380.499 1377.6247 0.21% 1374.7201 -0.21%
Reliance Liquid Fund-Treasury Plan 2934.297 2928.1634 0.21% 2921.1051 -0.24%
Principal Cash Management Fund  1170.899 1168.4451 0.21% 1165.4774 -0.25%
Religare Invesco Liquid Fund 1656.409 1652.6882 0.23% 1648.9476 -0.23%
Birla Sun Life Cash Plus  193.0481 192.6104 0.23% 192.1657 -0.23%
Sundaram Money Fund  25.4083 25.3473 0.24% 25.2935 -0.21%
Peerless Liquid Fund 12.6068 12.5759 0.25% 12.5597 -0.13%
JPMorgan India Liquid Fund 14.2731 14.2363 0.26% 14.2036 -0.23%
DSP BlackRock Liquidity Fund 28.4375 28.3608 0.27% 28.3021 -0.21%
Edelweiss Liquid  1188.91 1185.6322 0.28% 1183.8301 -0.15%
Tata Liquid Fund Plan A 2225.315 2219.1199 0.28% 2215.0341 -0.18%
ICICI Prudential Liquid  178.2966 177.7998 0.28% 177.5085 -0.16%
IDFC  Cash Fund  1465.352 1461.2355 0.28% 1458.8483 -0.16%
Escorts Liquid Plan 18.6281 18.575 0.29% 18.5786 0.02%
Axis Liquid Fund  1335.661 1331.8348 0.29% 1329.2837 -0.19%
Templeton India Cash Management Account 19.4942 19.4379 0.29% 19.4132 -0.13%
Canara Robeco Liquid-Regular Plan 1465.268 1460.997 0.29% 1458.4159 -0.18%
SBI Premier Liquid Fund 1894.858 1889.2991 0.29% 1886.0524 -0.17%
HDFC Liquid Fund 23.7783 23.7067 0.30% 23.6685 -0.16%
JM High Liquidity Fund 32.8678 32.7679 0.30% 32.7098 -0.18%
LIC NOMURA MF Liquid Fund 2185.199 2178.4663 0.31% 2174.9464 -0.16%
Birla Sun Life Floating Rate 160.2393 159.7396 0.31% 159.4547 -0.18%
BOI AXA Liquid Fund- Regular Plan 1386.982 1382.5764 0.32% 1380.3935 -0.16%
MS Liquid Fund  1184.616 1180.6085 0.34% 1178.8718 -0.15%
BNP Paribas Overnight Fund 18.552 18.4872 0.35% 18.4607 -0.14%
ICICI Prudential Money Market Fund 167.0005 166.3933 0.36% 166.1902 -0.12%
Daiwa Liquid Fund  1346.148 1340.9971 0.38% 1340.0904 -0.07%


(Note: Mirae Asset Liquid Fund is missing, which has reported a positive return till 30 July but the NAV is not available after that)

See carefully that yields on July 15 were just 7.5% for a short term security (CP, CD or govt debt of less than 1 year to maturity). Today these yields are at 10% or whereabouts, and yet, liquid funds have kicked into profit. The funda: for short term assets, the interest accrual on a bond will quickly overshadow the price drop (which is very short due to the small duration).

Yields won’t rise forever – they will find a top at which there will be enough buyers to keep the price steady. The question was – and I suppose, will be going forward – is the 10% the top, or will we see a higher number? This will tell you if you should buy bond funds.

Liquid funds on the other hand should only hurt if there is a potential of default, the risk of which, given the situation wit NSEL, I will not write off.

Mutual Funds that Owned Shares of Financial Technologies

5 comments Written on August 2nd, 2013 by
Categories: FinanTech, MutualFunds

Mutual funds owning FT stock are largely from the Reliance and Birla stable, it seems. Going purely from the shareholding on Jun 30 (the last we have) the shares they own are as follows, aggregated by AMC.

FT Shares held by Mutual Funds

Note that all of these are shares held on behalf of mutual fund holders.

In Bulk trades yesterday a few of the top shareholders exited their stake. Remember, anyone trading more than 0.5% of the days volume will get reported as bulk trades. Looking at the NSE and BSE together it seems that Birla and Reliance have exited part of their portfolio. (If the others were to exit, they would be too small to be reported in bulk trades, so it’s likely that they’ve exited as well)

Bulk Sellers of FT

Amal Parikh is probably related to the guys at Pivotal Securities, a firm that owns a large stake in FT.

Note that Birla sold at Rs. 271, which Reliance sold (in both BSE and NSE) at about 212. (Current prices are around Rs. 150)

Every single mutual fund scheme has a different account, and many funds have very tiny holdings, so their sales will also be invisible right now.

I’m saying that because you shouldn’t rush to sell the following mutual funds, which have reported holdings of FT as of Jun 30. Just for reference:

AMC Fund Shares % of portfolio
Reliance Reliance Growth Fund - RP  19,80,807 3.41%
Birla SL Birla SL Frontline Equity  4,70,196 1.16%
Reliance Reliance Equity Fund - RP 3,13,236 2.49%
Birla SL Birla Sun Life Midcap Fund  2,46,676 1.80%
Birla SL Birla Sun Life Equity Fund  1,04,811 1.25%
Reliance Reliance RSF - Balanced  1,01,220 1.46%
Birla SL Birla Sun Life 95 Fund  86,487 1.16%
Birla SL Birla SL Special Situations 43,142 2.44%
Birla SL Birla Sun Life Top 100  41,343 1.06%
Birla SL Birla SL Intl. Equity - B  39,210 1.97%
Birla SL Birla SL Advantage Fund  34,206 0.96%
Birla SL Birla SL India GenNext  15,510 0.84%
Religare Religare Invesco Tax Plan  12,442 0.72%
Birla SL Birla SL Small and Midcap Fund  10,225 0.87%
Reliance Reliance Growth Fund - IP  8,908 3.41%
Religare Religare Invesco Contra  7,363 1.21%
Reliance Reliance Growth Fund -Direct  7,303 3.41%
ING ING Multi-Mgr Eqty -A  5,560 2.37%
Religare Religare Invesco Mid Cap  5,040 0.78%
Birla SL Birla SL Long Term Advan.  4,989 0.29%
Birla SL Birla SL Frontline Eqty-Direct  4,044 1.16%
Birla SL Birla SL New Millennium  3,202 0.56%
Birla SL Birla Sun Life MIP  2,950 0.17%
Religare Religare Invesco Mid N SmallCap  2,597 0.75%
Birla SL Birla SL Midcap Fund -Direct  1,210 1.80%
Reliance Reliance RSF - Balanced -Direct  936 1.46%
Birla SL Birla SL India GenNext-Direct  675 0.84%
Birla SL Birla SL Top 100 - Direct  665 1.06%
Birla SL Birla SL 95 Fund -Direct  658 1.16%
Goldman GS CNX 500 Fund  491 0.06%
Birla SL Birla SL Equity Fund -Direct  381 1.25%
Birla SL Birla SL Advantage Fund -DIrect  310 0.96%
Birla SL Birla SL Small & Midcap -Direct  215 0.87%
Reliance Reliance Equity Fund -Direct  156 2.49%
Religare Religare Invesco Mid N Small-DP  50 0.75%
Religare Religare Invesco Tax Plan - DP  50 0.72%
Religare Religare Invesco Contra - Dir  30 1.21%
Religare Religare Invesco Mid Cap-Direct  27 0.78%
Birla SL Birla SL Special Situat.-Direct  22 2.44%
Birla SL Birla SL Intl. Equity B -Direct  13 1.97%
Birla SL Birla SL MIP - Direct  10 0.17%
Goldman GS CNX 500 Fund - Direct  7 0.06%
Birla SL Birla SL New Millennium-Direct  6 0.56%
Birla SL Birla SL Long Term Adv. -Direct  2 0.29%
ING ING Multi-Mgr Eqty-A -Direct  2 2.37%

(Source: Moneycontrol)

Investing in bond funds : What you actually need to know, by Dheeraj Singh

13 comments Written on July 26th, 2013 by
Categories: Bonds, MutualFunds

This is a guest post by Dheeraj Singh. Dheeraj was a fund manager for many years specializing in fixed income. He used to head fixed income at IL&FS Mutual Fund (before it got taken over by UTI) and subsequently worked with Sundaram BNP Paribas Mutual Fund (now Sundaram Mutual Fund) heading the fixed income desk. He runs Finanzlab Advisors, a treasury and risk management consultancy.

(Warning : Slightly long read, but probably worth it)

For the past week and a couple of days more investors in debt funds (of any flavor) have had a tough time.

RBI’s actions to constrain money market liquidity, in it’s attempt to arrest the fall in the value of the rupee in the foreign exchange markets, has led to a blood bath in the bond and money markets with yields rising sharply (equivalent to prices falling).

(Read: RBI has had two moves to constrain liquidity: One, Two)

Price movements have been large enough to ensure that even liquid funds could not ignore market prices in their valuations. Liquid fund net asset values are generally expected to grow by small amounts every day (by ignoring actual price changes). However that is true only if actual price movements in the market are small. In case of large price movements (generally greater than 0.1% on a portfolio basis) actual price movements have to be factored in.

Hardly had the market recovered from the initial RBI move announced late into the night on July 15, that we had some follow up measures on July 23, which exacerbated an already bad situation.

Consequently even liquid funds have generated negative day on day returns at least on two occasions within the last 10 days (as on July 25, 2013).

These developments have led to apprehensions in the minds of investors, several of them unfounded.

I have come across people labeling debt fund managers as incompetent. Nothing could be farther from the truth. Debt fund managers perform a very difficult task, that of managing the portfolio which is marked to market on a daily basis, within an uncertain and volatile environment. They do manage risks but that can be done only within the parameters of what is known and what can be anticipated. Unanticipated events like the RBI action are, by definition, impossible to protect against. Of course, there will always be some managers who are more skillful than the others. This doesn’t mean that we paint the entire community of debt fund managers with the brush of incompetence.

So, given the experience of the past few days, how should investors evaluate fixed income or debt mutual fund investments. It is no easy task, but some of the pointers below may enable investors to make a more informed decision

1. Appreciate the market linked nature of returns :

Returns from debt mutual funds come from two sources

i) the regular coupon accruals; and

ii) the gain or loss that arises due to fluctuation in market prices

Unless there are credit defaults, the coupon accrues regularly every day, usually at a fixed rate – this provides the regular daily return to investors in the fund as long as market prices do not change.

The situation becomes complicated however, as market prices are rarely constant. When prices go up, the return gets enhanced, and when they go down they take away from the regular accruals. When the price fall is large, the regular coupon can be completely wiped out by the extent of the price fall.

To get a view of the relative weightages of the two components in the total return, let’s consider a single security portfolio which has a coupon rate of 10% per annum. In such a case, the daily coupon accrual per Rs. 100 of investment can be calculated as

Daily Coupon Accrual =  0.10 * 100 / 365 = 0.0274

In other words the daily coupon accruals add a little less than 3 paise per Rs. 100 of investment. This corresponds to a return of 10% per annum.

In contrast, price changes on a day can sometimes be as large as 20 to 30 paise per Rs. 100 in case of very short term securities and as much as Rs. 2.00 to Rs. 3.00 in case of medium to long term securities.

When prices rise, they add to that 3 paise of coupon accruals. When they fall they take away from those accruals.

In effect, the returns are extremely sensitive to price changes in the market place.

This is what makes the return from these products attractive at times and unattractive at other times.

In the case of liquid funds which generally invest in securities maturing in 60 days or less, prices changes of upto 10 paise (approx.) are allowed to be ignored. Without this rule, returns from liquid funds would also suffer from volatility and the whole purpose of using liquid fund as a stable short term investment would be defeated.

However, when price changes are more than 10 paise, funds have no choice but to take on record these price changes and value the underlying securities accordingly. This is done to ensure that the valuation of securities in the portfolio does not deviate too much from the true market value. This is important since, if valuations are not close to market value, the fund returns would suffer volatility if and when the manager actually sells the security in the market.

The negative returns witnessed in liquid funds on a couple of occasions in the past few days was precisely for this reason (of valuing securities at their correct market prices). Prices fell by more than 10 paise and funds were forced to take on the actual market prices to value their portfolios.

This could as well have worked the other way. Had prices risen, returns from the funds would have been abnormally high. This kind of situation too occurs from time to time in the market, but since that’s generally good news for investors it gets ignored. Bad news commands a greater audience.

The revaluing of the portfolio of securities is actually a good thing for many reasons :

1) It is fair to new investors

While existing investors suffer, the revaluation of a portfolio provides new investors with an opportunity to invest and earn a fair market related return. Without revaluation new investors would suffer and existing investors would benefit. New investors would end up subsidizing existing investors. I’m sure none of us would like to be in such a situation.

This phenomenon can already be witnessed with liquid funds. Prior to July 15 liquid fund returns averaged about 8.0-8.5% per annum. After the fall in prices on July 16, returns started averaging about 10.0-10.5% per annum. This reflected the fact that yields in the money market had gone up by about 2% per annum. For new investors this provided an entry point to earn the higher return. If funds had not revalued (to avoid that negative one day return), new investors would still earn only 8-8.5% per annum.

This is a fundamental principle of any market mechanism and we should recognize it’s utility and fairness.

2) Interest rates do not rise (bond prices do not fall) indefinitely:

Unless we really manage to screw our economy very badly, interest rates generally move in cycles, meaning if they’re on the way up, they’re more than likely to reverse and start moving down. Conversely, if they’ve been moving down, they’re more likely to start moving up in the near future.

What this means is that, unlike equities, bond investments do not, generally, suffer from the “catching a falling knife” metaphor.

(Assumption : We’re considering only credit default free bonds. Prices of bonds issued by entities which default can fall continuously and even be worth nothing.)


3) Bond price movements actually become less sensitive at higher interest rates

Bond prices are most sensitive when interest rates are low - meaning, price changes can be large for even small changes in interest rates. However once interest rates have risen, this sensitivity goes down.

Price changes are larger when interest rates are low and smaller when interest rates are high.

This is better understood visually. The chart below depicts the price behaviour of a typical bond for different levels of yield.


(This is the general shape of the price yield curve of all option free bonds. The curve is downward sloping convex to the origin. While some bonds will display a more convex shape others may show a lesser convex shape. Higher convexity is a desirable feature in bonds).

Looking at the graph one can infer that prices movements are larger (P1 to P2) even for small yield changes (Y1 to Y2) when the absolute yield levels are low. Price changes are smaller (P3 to P4) even for a larger change in yield (Y3 to Y4) at higher levels of yield.

Effectively, once you invest at higher interest rates, the price risk that you take is much lower compared to the price risk that you take when you invest at lower interest rates, even if the portfolio of bonds remain identical.

This alone should dispel any doubts about investing in bonds or bond funds when yields have risen sharply and are likely to remain high only for a relatively short period of time. Conversely, if yields have fallen and are unlikely to sustain the fall, that is the time to start getting worried about your bond or bond fund investments.

The reality is when yields fall the positive price changes inflate our return. This manifests in complacency at the very time that caution is advisable. On the other hand, when yields have risen and are likely to fall sometime in the near future, it is possibly the best time to invest in bonds and bond funds with greater enthusiasm.

Disclosure : I have been a senior professional of the fund industry in the past. To that extent, some bias may creep into my writing. Also, I may possess information of and about the industry that may not be generally known. This could have a bearing on how and what I write.

Liquid Funds Move To Break-Even from July 16 Crash Within a Week

2 comments Written on July 23rd, 2013 by
Categories: Debt, MutualFunds

Liquid Funds have been getting bashed up recently with strange things happening in the liquidity bazaar. After their NAV fell for the first time in many years, many investors were spooked that these funds have too much risk on them.

However I had written:

As you can see, things have fallen only a little bit – we’re back to about the levels of about 10 days ago. Put another way, it might be prudent to stick around a few days longer and not panic-redeem the fund.

Tracking this, I have a new update on all the bond values as of yesterday. 18 out of the 38 funds have already recovered to their NAV levels of July 15. (the day prior to the big RBI announcement that caused the crash).

Fund Jul-22 Jul-15 From Jul-15 Jul-16 Jul16 Drop
ING Liquid Fund 24.7174 24.7486 -0.13% 24.6638 -0.34%
Quantum Liquid Fund 16.9711 16.9781 -0.04% 16.9308 -0.28%
DWS Insta Cash Plus Fund 19.7996 19.8131 -0.07% 19.7611 -0.26%
L&T Liquid Fund  1647.958 1649.0143 -0.06% 1644.7143 -0.26%
Kotak Liquid 2264.639 2266.0098 -0.06% 2260.2502 -0.25%
Principal Cash Management Fund  1167.788 1168.4451 -0.06% 1165.4774 -0.25%
Reliance Liquid Fund-Treasury Plan 2927.658 2928.1634 -0.02% 2921.1051 -0.24%
Birla Sun Life Cash Plus  192.5734 192.6104 -0.02% 192.1657 -0.23%
JPMorgan India Liquid Fund 14.2287 14.2363 -0.05% 14.2036 -0.23%
HDFC Cash Management Fund  25.1065 25.1135 -0.03% 25.0565 -0.23%
Religare Invesco Liquid Fund 1652.389 1652.6882 -0.02% 1648.9476 -0.23%
Sundaram Money Fund  25.337 25.3473 -0.04% 25.2935 -0.21%
Baroda Pioneer Liquid Fund 1377.384 1377.6247 -0.02% 1374.7201 -0.21%
Taurus Liquid Fund 1561.402 1561.726 -0.02% 1558.4587 -0.21%
DSP BlackRock Liquidity Fund 28.358 28.3608 -0.01% 28.3021 -0.21%
IDBI Liquid Fund 1289.337 1289.6532 -0.02% 1287.0052 -0.21%
UTI-  Liquid Fund-Cash Plan 1906.262 1906.8792 -0.03% 1903.0043 -0.20%
Axis Liquid Fund  1331.843 1331.8348 0.00% 1329.2837 -0.19%
Tata Liquid Fund Plan A 2218.965 2219.1199 -0.01% 2215.0341 -0.18%
Pramerica Liquid Fund  1001.432 1001.4746 0.00% 999.6694 -0.18%
Birla Sun Life Floating Rate 159.7611 159.7396 0.01% 159.4547 -0.18%
JM High Liquidity Fund 32.7717 32.7679 0.01% 32.7098 -0.18%
Canara Robeco Liquid-Regular Plan 1461.207 1460.997 0.01% 1458.4159 -0.18%
SBI Premier Liquid Fund 1889.596 1889.2991 0.02% 1886.0524 -0.17%
ICICI Prudential Liquid  177.8279 177.7998 0.02% 177.5085 -0.16%
IDFC  Cash Fund  1461.3 1461.2355 0.00% 1458.8483 -0.16%
LIC NOMURA MF Liquid Fund 2178.899 2178.4663 0.02% 2174.9464 -0.16%
HDFC Liquid Fund 23.7116 23.7067 0.02% 23.6685 -0.16%
BOI AXA Liquid Fund- Regular Plan 1383.122 1382.5764 0.04% 1380.3935 -0.16%
Edelweiss Liquid  1185.676 1185.6322 0.00% 1183.8301 -0.15%
MS Liquid Fund  1180.922 1180.6085 0.03% 1178.8718 -0.15%
BNP Paribas Overnight Fund 18.4919 18.4872 0.03% 18.4607 -0.14%
Peerless Liquid Fund 12.5804 12.5759 0.04% 12.5597 -0.13%
Templeton India Cash Management 19.4488 19.4379 0.06% 19.4132 -0.13%
ICICI Prudential Money Market Fund 166.4918 166.3933 0.06% 166.1902 -0.12%
Daiwa Liquid Fund  1342.385 1340.9971 0.10% 1340.0904 -0.07%
Escorts Liquid Plan 18.6029 18.575 0.15% 18.5786 0.02%
Mirae Asset Liquid Fund 1225.228 1223.5215 0.14% 1223.7909 0.02%

Strange Things are Happening in the Liquidity Bazaar

1 Comment » Written on July 19th, 2013 by
Categories: Banks, MutualFunds, RBI

In the days following the RBI hike in rates, we are seeing interesting movements in the fixed income markets.

Repo Bids Rise Substantially, But No MSF

Repo is what banks borrow overnight from RBI at 7.25%. MSF is the same thing, at 10.25%. Ever since the repo limit was introduced at 75,000 cr. (Previously: no limit) Repo bids have gone up like crazy, but only 75,000 cr. was allocated. However, the higher bids don’t mean that banks are desperate for funds – there was little or no borrowing in the MSF window for these days.

Date Repo Bids (Cr.) Repo Given MSF
16-Jul                   2,16,350               2,16,350 5
17-Jul                   1,41,970                   75,000 0
18-Jul                       97,265                   75,000 0
19-Jul                       56,860                   56,860 ?

Note that the restrictions on Repo were from 17 July.

From Game Theory, banks will attempt to bid more (since the repo allocation is pro-rata to the bid size every day), but even that impact has subsided with 19 July seeing less than the 75K cr. bid.

T-Bill auctions rejected

RBI conducts weekly auctions of about Rs. 12,000 for Treasury bills. This week, on wednesday, all bids were rejected for the two auctions scheduled, the 91-day and the 182-day T-Bills.

At the time of auction on Wednesday, T-Bill yields were about 9% to 9.5% in the market. If all bids were rejected, RBI really didn’t want to show that it was okay with these rates.

Rates in the market are now down to 8.50% for T-Bills.

OMO Sale Fails To Go Through

The RBI also intended to remove 12,000 cr. of money from the system by selling securities in an OMO auction. (How this works: RBI Sells Securities it has on its books. Banks pay money. That money goes out of circulation since it’s now with the RBI. So money supply actually reduces.)

The auction saw only 2,500 cr. of sales by RBI, and those too of the 2026 and 2030 bonds. None of the bids in the 2017 and 2022 were accepted.

I think that’s because the 2022 bond (8.13% today) is trading too close to the 2026 bond in terms of yields, and the 2017 bond (8.26% today) is trading EVEN higher. The RBI lives in a world where it believes inverted yield curves are not acceptable, I guess; so they rejected bids for the shorter term bonds. Just my opinion.

Post the OMO auction failure, yields fell substantially. The 2023 bond went down below 8%.

Mutual Fund Special Repo Sees No Desire

There was a special repo to meet redemption needs of mutual funds, where MFs would make a request to banks, who could borrow in a special 10.25% rate auction. Although some funds have reportedly borrowed from banks, these banks have chosen to not participate in the auction at all. and there was ZERO borrowing.

This could be a violation of rules where an MF request HAS to be run through the special repo window. But banks are flush with cash; they probably decided to lend it from their own surplus and face the consequences.

(Note: There aren’t any consequences to banks, or to anyone doing any sort of illegal activity, I know. Please stop laughing.)

The Impact

You might complain about the RBI move, that it was premature, that it was not required, that it will stymie growth, it will hurt liquid funds and credit growth etc.

Yet, it’s apparent that the move hasn’t yet hurt liquidity in any serious manner and after a few days, the markets seem to have taken it in stride. Sure, interest rates are higher – yields are up about 1% to 2% on everything – but that’s bound to be the case when the goal of the RBI is to cut liquidity (money does become more expensive).

Are these measures short-term? Some bankers would like to think so. The challenge will be evident when the September crunch arrives as corporates head to pay taxes and take money out of the system.

The Rupee is at 59.79 and while it has come off from the Rs. 60 highs, it is still under pressure.

FIIs have continued to sell debt, with over $240 million worth of rupee debt being sold in the last three days (full July: $1.9 billion). 

Growth will (and should) be hit; the stability in inflation provided by liquidity measures will take at least six months to a year to come through. A lot will happen by then, so it’s way too early to call.

Liquid Funds Rebound, Normalcy Begins To Return

3 comments Written on July 18th, 2013 by
Categories: MutualFunds

For those of you who fear having to exit liquid funds due to their unusual fall in one day, note that yesterday bond markets were more stable, and therefore liquid funds made money.

Here’s a list of the same funds that crashed in value on Tuesday, to how they closed on wednesday. They’ve recovered between  0.02% and 0.09%.

Fund Jul-17 Jul-16 Change Prev Day Change
ING Liquid Fund 24.6738 24.6638 0.04% -0.34%
Quantum Liquid Fund 16.9457 16.9308 0.09% -0.28%
DWS Insta Cash Plus Fund 19.7696 19.7611 0.04% -0.26%
L&T Liquid Fund  1645.211 1644.7143 0.03% -0.26%
Kotak Liquid 2261.222 2260.2502 0.04% -0.25%
Principal Cash Management Fund  1165.895 1165.4774 0.04% -0.25%
Reliance Liquid Fund-Treasury Plan 2922.926 2921.1051 0.06% -0.24%
Birla Sun Life Cash Plus  192.2734 192.1657 0.06% -0.23%
JPMorgan India Liquid Fund 14.2078 14.2036 0.03% -0.23%
HDFC Cash Management Fund  25.0657 25.0565 0.04% -0.23%
Religare Invesco Liquid Fund 1649.653 1648.9476 0.04% -0.23%
Sundaram Money Fund  25.3007 25.2935 0.03% -0.21%
Baroda Pioneer Liquid Fund 1375.223 1374.7201 0.04% -0.21%
Taurus Liquid Fund 1559.093 1558.4587 0.04% -0.21%
DSP BlackRock Liquidity Fund 28.3163 28.3021 0.05% -0.21%
IDBI Liquid Fund 1287.485 1287.0052 0.04% -0.21%
UTI-  Liquid Fund-Cash Plan 1903.51 1903.0043 0.03% -0.20%
Axis Liquid Fund  1329.715 1329.2837 0.03% -0.19%
Tata Liquid Fund Plan A 2215.65 2215.0341 0.03% -0.18%
Pramerica Liquid Fund  999.9687 999.6694 0.03% -0.18%
Birla Sun Life Floating Rate 159.4973 159.4547 0.03% -0.18%
JM High Liquidity Fund 32.7202 32.7098 0.03% -0.18%
Canara Robeco Liquid-Regular Plan 1458.891 1458.4159 0.03% -0.18%
SBI Premier Liquid Fund 1886.969 1886.0524 0.05% -0.17%
ICICI Prudential Liquid  177.563 177.5085 0.03% -0.16%
IDFC  Cash Fund  1459.237 1458.8483 0.03% -0.16%
LIC NOMURA MF Liquid Fund 2175.595 2174.9464 0.03% -0.16%
HDFC Liquid Fund 23.6759 23.6685 0.03% -0.16%
BOI AXA Liquid Fund- Regular Plan 1380.926 1380.3935 0.04% -0.16%
Edelweiss Liquid  1184.117 1183.8301 0.02% -0.15%
MS Liquid Fund  1179.191 1178.8718 0.03% -0.15%
BNP Paribas Overnight Fund 18.4661 18.4607 0.03% -0.14%
Peerless Liquid Fund 12.5647 12.5597 0.04% -0.13%
Templeton India Cash Management Account 19.4173 19.4132 0.02% -0.13%
ICICI Prudential Money Market Fund 166.2499 166.1902 0.04% -0.12%
Daiwa Liquid Fund  1340.511 1340.0904 0.03% -0.07%
Escorts Liquid Plan 18.5827 18.5786 0.02% 0.02%
Mirae Asset Liquid Fund 1224.063 1223.7909 0.02% 0.02%

Today yields have softened further (Thursday) with T-Bills quoting at 8.7% (versus Tuesday’s 9.5%). We should see short term funds (liquid, ultra-short term and bond funds) rebound further.

The point is: Don’t run off in a panic. We’ll see the NAVs return to the pre-RBI announcement values within two weeks, at this rate. Unless, of course, there is more drama to come! (I’ll track this weekly)

Revisiting the "Promoter Put" in Mutual Funds: Dheeraj Singh

1 Comment » Written on July 18th, 2013 by
Categories: MutualFunds

This is a guest post by Dheeraj Singh. Dheeraj was a fund manager for many years specializing in fixed income. He used to head fixed income at IL&FS Mutual Fund (before it got taken over by UTI) and subsequently worked with Sundaram BNP Paribas Mutual Fund (now Sundaram Mutual Fund) heading the fixed income desk. He runs Finanzlab Advisors, a treasury and risk management consultancy.

Four years ago, I'd written about how the "Promoter Put" - an implicit assumption that promoters of mutual funds would protect investors from large losses in case of adversity - had led to investor complacency and eschewing of prudent risk assessment. This in turn led to an anomalous situation that investments in funds were decided based on perceived brand value of the promoter entity rather than the actual performance of the fund or skills of the fund manager.

The signalling effect of the "Promoter Put" was strong enough for large investors to invest based on the likelihood of the parent bailing out the fund house in case of adversity. The thinking was - they have a reputation to protect, so why worry - they'll take a hit to protect us.

Recent developments may have put a small dent to that belief, though, and rightly so.

When RBI clamped down on liquidity and raised some interest rates in an effort to rein in exchange rate volatility, the direct impact of the move was felt in the bond and money markets. Yields on short term securities went up sharply by about 2%. In other words, prices of those securities fell sharply. One category of funds for which this was of special import were liquid funds. Liquid funds are products where you expect the NAV to rise by a small amount every day. Also, since liquid funds hold securities which are of a short maturity, they are allowed to ignore actual price deviations (which in the normal course are generally small) and accrue income at a fixed rate.

However, when actual price changes become large, the value of the funds' securities (as reflected in it's NAV) may vary significantly from it's true market value. When the NAV becomes significantly overstated (meaning the actual prices of the securities in the portfolio are much lower), savvy investors redeem (since they are aware of this divergence in values) and the fund comes under liquidity pressure.

A situation like this was seen on July 16 when liquid funds witnessed large redemptions (largely from bank investors) at a time when prices of the underlying securities fell sharply. This was in the wake of RBI's actions on the night of July 15.

Even more morbid was the fact that these very same investors would then try and buy the securities (or invest in other alternative securities) at a much higher yield. This would place the fund under even more pressure since selling at a higher yield means locking in the true value of securities which would lead to a fall in NAV. In the past fund houses have tried to protect the fund's investors by either trying to generate liquidity through alternate means (and thus avoid selling securities) or sell the securities but absorb the losses elsewhere (possibly the asset management company).

A similar situation was witnessed in October 2008 when the fund industry faced a full blown liquidity crisis. What started as a small problem related to exposure to real estate assets in one segment of the industry (viz FMPs) turned into a full blown crisis as funds (in their own wisdom) decided to ignore the true market price of securities and protect investors from losses. The result was that savvy investors walked away and the remaining investors were left holding the baby. When the trickle of redemptions became a flood within a couple of days, there was no shelter and the industry faced a serious liquidity crisis. Even during the extremely stressful days of October 2008, liquid fund returns displayed remarkable stability. Of course, valuation guidelines in 2008 were relatively lenient as compared to what they are today and this allowed the funds to remain within the law in spite of the crisis. However, in their effort to prevent losses to investors, the asset management companies and their parents had to absorb some losses.

Cut to today, and July 16 witnessed conditions similar to October 2008. As is typical in such situations, the industry did face large redemptions once savvy investors realised that the true value of securities had fallen sharply. Most of these investors were banking on the "promoter put" - that they would be protected, and therefore it was better to scoot as early as possible before the situation got out of hand.

However, on this occasion, the industry closed ranks and decided to pass on the valuation losses to investors (in the form of reduced NAV) even in liquid funds. Mutual Funds decided to mark their securities to the true value that they would fetch in the market place. The result was that, possibly, for the first time in the history of mutual funds in India, the liquid fund category gave negative day on day returns (on July 16) across most fund houses.

(Read: Liquid Fund NAVs fall for the first time in five years)

And rightly so. Mutual Funds are pass through products and investor get to share not just the upside but also the downside. The one day loss suffered by liquid funds on July 16 wiped out about 10 days of returns. This loss will however be recovered in the next 7 days (assuming short term interest rates remain stable). So, the worst affected would be liquid fund investors who invested on or about July 5. They would not witness positive returns for about two weeks. While they may be disappointed, this is fair enough. The RBI action was something that nobody had anticipated, and somebody will eventually be affected adversely.

Had this happened in the past, fund houses which gave a negative return would have faced a backlash and be subjected to outflows to the extent that they may have to almost down shutters. Many people feared the same may happen on this occasion too. However, what actually happened surprised many. Some banks which had redeemed in large numbers decided to cancel their redemption requests, once they realised that the industry was passing on the losses to investors in the fund. Even more importantly, now that the security valuations had been marked down to market yield levels, the daily accruals from the fund also reflected the market yield levels. This meant that fresh investors were duly and fairly compensated on their investments. Liquid funds are now accruing income at close to 10% which should cheer the new investors. These funds should therefore see healthy inflows.

RBI has opened a window of liquidity support for funds. I do not, however. expect funds to use this in a big way. There will be no need to. Even if they face redemptions, fund managers can now sell securities to generate cash since the securities are now marked to their correct market values, and there will be no further loss on an actual sale of securities.

The decision to correctly mark securities to market was an easy one to take, since it was the entire industry which was affected at the same time. The notion of "Promoter Put" being consigned to the dustbin would however be tested only when fund houses face similar situations which are not industrywide. Courage would be on test then.

The events of the past few days have however reinforced one simple belief: It is always good to do the "right" thing.

Disclosure : I have been a senior professional of the fund industry in the past. To that extent, some bias may creep into my writing. Also, I may possess information of and about the industry that may not be generally known. This could have a bearing on how and what I write.