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NBFC crisis triggers first overnight fund in four years

Fundhouses including, Sundaram, DSP, Kotak and IDFC rush to launch such funds, first time after 2014

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Post the recent IL&FS default, asset management companies are in a rush to file for overnight funds with the market regulator as they are considered less risky than liquid funds by risk-averse corporate houses.

In November, five mutual fund houses including Sundaram Mutual Fund, DSP Mutual Fund, Kotak Mutual Fund, IDFC Mutual Fund, Reliance Mutual Fund approached Securities and Exchange Board of India (Sebi) for approval to launch overnight funds.

In October, ICICI Prudential Mutual Fund and Aditya Birla Sun Life Mutual Fund had sought Sebi's approval and thereafter launched their overnight funds.

Usually, large corporate invest in liquid schemes such as commercial papers, treasury bills, and certificate of deposit. A number of mutual fund companies have invested in commercial papers of the non-banking financial companies (NBFCs), including IL&FS, which defaulted on payments to its lenders and failed to meet the commercial paper redemption obligations in September. This pushed the panic button in the market.

The rekindled interest for overnight funds in October and November was witnessed after a period of four years of lull. The last filing with Sebi for an approval was made in January 2014 by Peerless Mutual Fund, which was acquired by Essel Mutual Fund in 2016.

Radhika Gupta, CEO, Edelweiss Mutual Fund, said this happens every 5-6 years when there is extreme panic in the market.

She said when institutional investors worry about investing in liquid funds, then overnight funds spring up as investors want to get CBLO (collateralised borrowing and lending obligations) rate, their asset under management (AUM) spikes to Rs 10-20,000 crore but then falls back once market normalises.

"It is a short term thing and a function of fear-oriented market," she said.

Post IL&FS issue, there is liquidity squeeze in the system and a massive demand for it. The Reserve Bank of India has not opened its window for NBFCs yet, and thus investors are wary of investing in liquid funds now. Overnight funds for them are a much safer bet as it matures overnight, said a fund manager with a private fund house.

Almost all mutual funds are liquid funds which invest in debt and money market securities.

"This is kind of re-branding. But unlike liquid funds which have maturity up to 91 days, overnight funds mature in one day," said another fund manager with private fund house, adding that the return on overnight funds are, however, lower than liquid funds.

"But lack of exposure to NBFC paper makes it less risky options for risk averse institutional investors," the fund manager said.

FLIGHT TO SAFETY

  • In October, ICICI Prudential Mutual Fund and Aditya Birla Sun Life Mutual Fund had sought Sebi's approval and thereafter launched their overnight funds
     
  • The last filing with Sebi for an approval was made in January 2014 by Peerless Mutual Fund, which was acquired by Essel Mutual Fund in 2016.
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