INSUBCONTINENT EXCLUSIVE:
By Subhadip SircarCorporate treasury departments in India have become so concerned about credit risk they’re increasingly parking their
cash in securities maturing overnight.
Assets with overnight funds soared to 123 billion rupees ($1.8 billion) last month, from 39 billion
rupees in September, as companies chose safety over returns in the wake of a rare debt default, data from Morningstar Investment Adviser
Strong demand has seen five firms, including Reliance Nippon Life Asset Management Ltd., lining up offerings.
Overnight funds could gain
more heft if the regulator tightens rules for money-market funds, which in September suffered the worst outflows since at least April 2007
amid defaults at the ILFS Group
Strictures such as directing liquid funds to mark to market the value of more bonds, if implemented, will sustain demand as overnight plans
don’t face interest rate or credit risks, said Rajeev Radhakrishnan, head of fixed income at SBI Funds Management.
The ILFS stumbles were
a reminder that money-market funds, which account for a fourth of 23 trillion rupees of industry assets, are also fraught with risk
Several fund houses marked down their holdings of debt issued by ILFS, with some liquid funds losing as much as 5 percent -- or half a
year’s worth of gains -- in a single day.
“As a fallout of the ILFS crisis, institutional investors have been wary about the safety of
the portfolios of liquid and ultra-short duration funds,” said Kaustubh Belapurkar, director manager - research at Morningstar.
Overnight
funds, which hold securities like the so-called collateralized borrowing and lending obligation, have returned 5.9 percent in the 12 months,
compared with 6.8 percent for liquid funds that invest in treasury bills and commercial paper, according to Value Research India
Still, the stress suffered by commercial paper after the ILFS crisis means investors are discriminating on credit quality, said Karthik
Srinivasan, senior vice president at ICRA Ltd., a rating agency.
That said, the future of overnight funds depends on how the regulatory
framework for liquid funds evolves, debt managers say.
“Overnight funds will become a distinct category” if rules for liquid funds are
tightened, said Killol Pandya, head of fixed income at Essel Funds Management
“Otherwise, they will remain the flavor of the season.”
