Lack of liquidity in the debt markets hurts MF investors in debt categories

The MF industry has sought liquidity support from the Reserve Bank of India.
Lack of liquidity in the debt markets has started to hurt mutual fund (MF) investors in debt categories, with yields in shorter-tenure markets moving up 100-150 basis points in the current month.

Over a one-month period, medium-duration schemes have given negative returns of 3.4 per cent, while short-duration and low-duration schemes are down 1.7 per cent and 1.9 per cent, respectively.

Experts say there has been heavy selling of shorter-tenure bonds in the markets, and given the lockdown, their buying capacity has shrunk significantly.

According to industry participants, fund houses are also being forced to sell debt papers as redemption pressures from investors is seeing a spike.

“Foreign institutional investors have sold Rs 8,000 crore -Rs 10,000 crore in the current month. Meanwhile, volumes in the markets have thinned as fund houses and other participants are seeing disruptions because of work-from-home advisories,” said a fund manager.

“Corporate investors are accessing liquid funds to meet debt obligations as business operations have come to a standstill. Apart from this, investors pull out funds during the quarter-end and year-end periods,” said another fund manager.

Overall, the debt market has witnessed heavy selling from foreign institutional investors (FIIs) this month. According to the National Securities Depositories’ data, FIIs have sold Rs 52,000 crore worth of securities in March.

Meanwhile, experts say the widening of spreads in the shorter-tenure bond market makes it an attractive proposition to take fresh positions. “The spreads have turned attractive. These are expected to ease as the government infuses liquidity into the system. Investors holding exposure in the shorter end, as well longer-end of the market should continue with these funds. For new investors, this is a good opportunity. We should see some improvement in April,” said Joydeep Sen, founder of wiseinvestor.in

The MF industry has sought liquidity support from the Reserve Bank of India (RBI) amid rising redemption pressures from corporates in liquid schemes, which hold shorter-tenure corporate bonds.

 



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