Liquid Funds NAVs Fall for the First Time in 5 Years

Liquid Fund Investors have taken it on the chin with the fall in bond prices yesterday. Across the spectrum, for the first time since 2008, Liquid Funds have fallen around 0.2% on July 16, which is an annualized fall of….wait, let’s not get stupid and try to annualize a one day fall in bonds. Here’s the list:

Fund

Jul-16

Jul-15

Change

ING Liquid Fund

24.6638

24.7486

-0.34%

Quantum Liquid Fund

16.9308

16.9781

-0.28%

DWS Insta Cash Plus Fund

19.7611

19.8131

-0.26%

L&T Liquid Fund

1644.7143

1649.0143

-0.26%

Kotak Liquid

2260.2502

2266.0098

-0.25%

Principal Cash Management Fund

1165.4774

1168.4451

-0.25%

Reliance Liquid Fund-Treasury Plan

2921.1051

2928.1634

-0.24%

Birla Sun Life Cash Plus

192.1657

192.6104

-0.23%

JPMorgan India Liquid Fund

14.2036

14.2363

-0.23%

HDFC Cash Management Fund

25.0565

25.1135

-0.23%

Religare Invesco Liquid Fund

1648.9476

1652.6882

-0.23%

Sundaram Money Fund

25.2935

25.3473

-0.21%

Baroda Pioneer Liquid Fund

1374.7201

1377.6247

-0.21%

Taurus Liquid Fund

1558.4587

1561.726

-0.21%

DSP BlackRock Liquidity Fund

28.3021

28.3608

-0.21%

IDBI Liquid Fund

1287.0052

1289.6532

-0.21%

UTI- Liquid Fund-Cash Plan

1903.0043

1906.8792

-0.20%

Axis Liquid Fund

1329.2837

1331.8348

-0.19%

Tata Liquid Fund Plan A

2215.0341

2219.1199

-0.18%

Pramerica Liquid Fund

999.6694

1001.4746

-0.18%

Birla Sun Life Floating Rate

159.4547

159.7396

-0.18%

JM High Liquidity Fund

32.7098

32.7679

-0.18%

Canara Robeco Liquid-Regular Plan

1458.4159

1460.997

-0.18%

SBI Premier Liquid Fund

1886.0524

1889.2991

-0.17%

ICICI Prudential Liquid

177.5085

177.7998

-0.16%

IDFC Cash Fund

1458.8483

1461.2355

-0.16%

LIC NOMURA MF Liquid Fund

2174.9464

2178.4663

-0.16%

HDFC Liquid Fund

23.6685

23.7067

-0.16%

BOI AXA Liquid Fund- Regular Plan

1380.3935

1382.5764

-0.16%

Edelweiss Liquid

1183.8301

1185.6322

-0.15%

MS Liquid Fund

1178.8718

1180.6085

-0.15%

BNP Paribas Overnight Fund

18.4607

18.4872

-0.14%

Peerless Liquid Fund

12.5597

12.5759

-0.13%

Templeton India Cash Management Account

19.4132

19.4379

-0.13%

ICICI Prudential Money Market Fund

166.1902

166.3933

-0.12%

Daiwa Liquid Fund

1340.0904

1340.9971

-0.07%

Escorts Liquid Plan

18.5786

18.575

0.02%

Mirae Asset Liquid Fund

1223.7909

1223.5215

0.02%

HSBC Cash Fund

11.4467

11.4248

0.19%

Even a 0.2% fall is large enough to spook investors. Liquid funds are typically funds where you expect the NAV will go up every day, as long as the bonds that the MF has bought don’t default. And in general, rules allow mutual funds to “straight line” the NAV. Example:

• I buy a Government Treasury-Bill with 30 days left to maturity, at Rs. 99.70.

• Tomorrow, because of some drama in the market, the price falls to Rs. 99.60

• I have made a “mark-to-market” loss of Rs. 0.10 – which should reflect in my portfolio

• However, the T-Bill will give me Rs. 100 in the last 29 days, and the government backs it, so there is little risk of default

• In such a case, I am allowed to mark the bill using the straight line method – From 99.70 to 100 in 30 days, or Rs. +0.01 every day. So I’ll say the next day the price is Rs. 99.71.

This is okay in a one-off case. But what if, when the price falls, half my investors redeem their money? I will know of redemptions only after market hours, so what should my NAV really be?

If I have to sell in the market at Rs. 99.60, but if I tell investors that the price is 99.71, the differential is a Rs. 0.11 that doesn’t exist.

Earlier, like Dheeraj writes, there was a “promoter put” in place – an implicit assumption that in such cases, the promoter of the mutual fund would take the hit and not allow investors to see losses. The promoter may buy a distressed security at the higher price and take it on his own books, like it happened when Deccan Chronicle defaulted on paying back a few mutual funds.

This is effectively the promoter underwriting your losses – a “put” option given to you for free. But obviously in a system-wide fall in prices, it will be impossible for any mutual fund promoter to take the hit.

Yesterday was one such case. Prices of nearly all securities fell. And it seems redemptions were a massive number, with many entities hoping that the “promoter put” will save them from action. However, it looks like Mutual Funds decided, all together, that they can’t have this happen – and so, all funds were marked down to the market.

Liquid fund investors will be spooked – after all you never really worry about loss of principal in what is supposed to be a safe investment, and here you’re losing 0.2%. But this spookiness is the correct thing – all investors need to understand that at the edge, there is risk. If liquid fund investors can stick around a little longer, they are likely to see a recovery (if the funds don’t have to sell the underlying investments, which will converge to par in a short while). But when patience does not exist, the hit has to be taken.

Take the largest Liquid Fund, ICICI Prudential Liquid plan (nearly 20,000 cr. in assets) and how it’s NAV has been hit.

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.

If yields fall further – short term yields are now at 9.5% – these funds might just be a great place to put additional money into.

To help redemptions go through smoothly, RBI has allowed banks to borrow in a special repo window (temporary) at the higher 10.25% rate to lend to mutual funds (who can give the underlying collateral as security instead of selling it). Given that funds have marked their positions to market, they might not need such a facility, but it’s useful to have it, even if the rate is 10.25%.

Two clear takeaways:

• Don’t panic, things aren’t quite as bad as they seem, such funds will rebound.

• If short term yields go up further, you might get a great deal if you put in additional money.