The deployment of funds by mutual funds (MFs) in commercial papers (CPs) issued by non-banking finance companies (NBFCs) maturing in less than 90 days rose to a 21-month high in May, according to data from the Securities and Exchange Board of India’s (SEBI) website.
Fund managers attribute this trend to attractive yields on CPs issued by NBFCs and higher inflows in liquid funds.
"MF schemes operating in the money market space have received good flows this quarter. Deploying 15-20 percent of the fund corpus in CPs issued by NBFCs of tenors up to 91 days offer great opportunities for these funds to optimise portfolio yields," said Kedar Karnik, Fund Manager, DSP Mutual Fund.
"Due to increase in liquidity, we have seen increase in assets under management (AUM) of Liquid Fund & Money Market Funds. NBFC being highest yield asset as seen sharp jump i.e. in line with the AUM growth," said Abhishek Bisen, Head of Fixed Income & Fund Manager, Kotak Mahindra Asset Management Company.
According to the SEBI data, MFs deployed Rs 61,154.98 crore in CPs issued by NBFCs with tenors of up to 90 days, which is a 21-month high. The last time, the deployment was higher than this was in July 2021, at Rs 69,398.54 crore.
CPs are short-term debt instruments issued by companies to raise short-term funds for up to one year. The segment up to three months (or 90 days) is the most liquid segment in the short-term debt market, say dealers.
Usually, the interest rates on CPs issued by NBFCs are higher than those issued by manufacturing or other companies. This is because investors seek a premium over other companies due to the higher risk.
But some prominent NBFCs, such as Bajaj Finance, HDB Financial Services, etc., offer slightly lower interest rates on their CPs.
Flows into liquid funds
According to the Association of Mutual Funds in India (AMFI) data, liquid funds in May received inflows worth Rs 45,234.22 crore. This saw most fund houses deploy their funds into short-term debt instruments.
Also, on some days in May, the yields on these instruments were higher due to higher call money rates, which also prompted MFs to deploy their funds in less than 90-day CPs, dealers said.
A liquid fund is a debt fund that invests in fixed-income instruments like CP, government securities (G-Secs), treasury bills (T-Bills), etc. with a maturity of up to 91 days.
Prior to this, in the January-March quarter, outflows from liquid funds were heavy at Rs 73,270.06 crore.
CP issuances in May
Issuances of CPs in May saw a rise of over 6 percent to Rs 1.18 lakh crore.
As per Prime Database data, companies issued Rs 1.18 lakh crore worth of CPs, compared to Rs 1.11 lakh crore in the previous month.
The marginal rise in issuances in May came after the rates on these instruments eased following the Reserve Bank of India’s (RBI) liquidity injection into the banking system through a 14-day variable rate repo auction and the withdrawal of the Rs 2,000 denomination banknotes from circulation.
The rates on these instruments eased by 7-12 basis points (bps). One basis point is one-hundredth of a percentage point.
The central bank injected liquidity into the banking system despite the higher surplus liquidity at that time to address the liquidity stress of some banks and institutions.
Because of this stress, call money rates in the market traded above the repo rate and near the marginal standing facility (MSF) rate. This led to rates on other debt instruments in the market rising.
But liquidity injections by the central bank eased concerns and rates.
Currently, the rates on papers issued by NBFCs maturing in three months were in the 7.50-7.20 percent range, while those of manufacturing companies are at 6.98-7.08 percent.
Outlook
Experts are of the view that inflows into liquid funds will determine the deployment of funds in this segment.
Karnik further added that if assets under management (AUM) sustain at current levels, one can expect commensurate demand from MFs for these instruments.
However, Bisen added interest rates are likely to trend lower and liquidity in the system should remain at similar levels. Hence Liquid Fund and Money Market funds are likely to remain at current and gradually increase from here till March 24.
"This will result in continuous demand from NBFC assets from MF, provided the is credit spread is appropriate." Bisen said.