Mutual Funds Face severe challenges ahead

Mutual Funds will have to face severe challenges ahead in the coming months as the MF industry as a whole found it really tough to weather the market meltdown as the average assets under management (AUM) of the industry plummeted by Rs 97,200 crore, or 18.37 per cent, in October. This is the worst performance by the mutual fund sector in its history with some of the funds are finding it tough to manage redemption. Though banks have come forward to help mutual funds, they want banks to lower the interest rate on loans given through a special window opened by the RBI.

The total AUM of the MF sector fell below the Rs 5 lakh crore mark to Rs 431,901 crore in October, as per the latest figures released by the Association of Mutual Funds of India (AMFI). Though Reliance Mutual Fund maintained its leading position as the largest AMC, it was the greatest loser as its AUM fell by 15,401 crore in the last month. ICICI Prudential assets fell by 21 per cent to Rs 39,182 crore. HDFC, UTI and Birla also suffered a decline in assets.

The industry faced redemption pressures as Corporates made quick exits from the fixed maturity plans coupled with panic selling by many foreign institutional investors. Though it seems like sense is returning to the markets, mutual fund watchers are still sceptical to comment whether the AUM would see an upward movement this month.

With MFs finding it tough to get funds, banks on Sunday assured liquidity support to mutual funds to meet their funding needs at competitive rates in the wake of a slew of measures announced by the Reserve Bank on Saturday. Banks have so far given Rs 15,000 crore to mutual funds under the special facility for up to Rs 60,000 crore started by the Reserve Bank, but fund houses wanted loans on more easier terms.

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On Tuesday, Finance Minister Mr. P Chidambaram called a meeting of heads of big state-run banks, Indian Banks’ Association (IBA) and AMFI to discuss the liquidity situation with fund houses. “We want that commercial deposits of all banks and commercial papers to be accepted by the banks, and interest rate to be reasonable,” AMFI chairman Mr. A P Kurian said.

“We feel the lending rates are slightly higher. So we thought of flagging the issue,” he said. The finance minister directed both the IBA and AMFI to resolve the problems. SBI chairman Mr. OP Bhatt had said his bank was keen to lend money to MFs between 11 and 12 per cent under the special facility.

Mr. Kurian said the liquidity situation with fund houses was manageable now and they could borrow money from banks whenever there was redemption pressure. IBA and AMFI have set up a panel which would meet occasionally to iron out difference and resolve the problems

Source : The Indian Express (04-11-08)

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