IL&FS jitters erode 12.5% of MF assets

The crisis linked to Infrastructure Leasing & Financial Services (IL&FS) has hit the mutual fund (MF) industry hard, with 12.5 per cent, or ~3.16 trillion, of industry assets getting shaved off in a single month. Total assets under management (AUM) shrunk to ~22.04 trillion in September from ~25.2 trillion at the end of August.

Most of the damage was due to record outflows from liquid and fixedincome schemes, where large investors invested. The two schemes saw outflows of ~2.4 trillion in September — the most since at least January 2008. The pullout in debt market schemes alone accounted for close to 10 per cent of August’s AUM tally.

Industry participants attribute the sharp pullout to nervousness among corporate investors following the IL&FS default, which had quasi-sovereign status. The large amount of outflow has caught the industry by surprise. Industry had earlier estimated outflows in such schemes at around ~1 trillion.

“The pullout is higher than expected. There has been a flight to safety triggered by the IL&FS event. The sale of Dewan Housing Finance (DHFL) debt papers at high yields has aggravated the concerns,” said Swarup Mohanty, chief executive officer of Mirae AMC.

Radhika Gupta, chief executive officer of Edelweiss MF, said the liquid schemes tended to have high outflows in September. “However, the outflows seen in fixed-income schemes were not expected,” she said.

The sharp downgrade of IL&FS in a matter of days had raised concerns in the corporate bond market, said Raj Kumar, chief executive officer of LIC MF. “Investor panic got triggered when the AAA-rated debt paper of DHFL was sold at 11 per cent.”

Such high yield is unusual for AAArated papers, which typically trade between 8 per cent and 9 per cent.

Industry players said investors pulled out money fearing contagion risks from the IL&FS default.

The unexpected redemption pressure led to liquidity crunch at fund houses. Some of them had to consider bank borrowing to honour redemption requests, according to industry sources.

The move also caught the attention of regulatory bodies such as the Securities & Exchange Board of India (Sebi), which called for an industry meeting to discuss risk management practices, sources said.

At present, MFs can borrow up to 20 per cent of their net assets for six months to meet redemptions and repurchase, and pay interest and dividends to unit holders. This allows fund houses to borrow from banks an amount that is directly proportional to their AUM in a particular category. This means if the liquid asset of a fund house is ~1 billion, the fund house can borrow ~200 million to meet redemption needs.

Industry participants add that the situation in the industry should stabilise in the coming days.

“Some banks have already started returning to the liquid schemes. Hopefully, the situation will improve within a week,” an official of a fund house said.

However, other industry participants believe investors may take more time to return to debt market schemes. “The recent revelation that as many as 348 entities are part of the IL&FS group has raised concerns over the real contagion risk the IL&FS group poses for the corporate bond market.”

While debt market schemes saw outflows in September, the equity schemes saw net inflow of ~111 billion, rising 33 per cent month on month. The contribution through systematic investment plans (SIPs) saw a marginal rise to ~77.27 billion. Market players said equity and SIP inflows could be impacted going ahead given the surge in equity market volatility.