When will we analyse MF inflows-outflows correctly?

July 30th, 2010

Mutual funds assets under management (AUM) data published by the Association of Mutual Funds in India (AMFI) every month has been news item for all financial journalists. Unceremoniously, journalists interpret the AUM’s inflows and outflows attributing to banks and corporate sector as major culprit. The financial experts supply appropriate quotes to respective reporters to authenticate news analysis.
However, the interpretation turns out to be careless work if reporters analyse the monthly AUM data more carefully, and with the help of supportive information provided by the AMFI.  The heavy redemption at the end of quarter has been more or less mandatory with the mutual funds debt schemes contain 45 per cent portfolio with one to three month maturity. Another 21 per cent debt portfolio expires between 3-6 and 6-12 months.

Historical evidence suggests that debt funds face outflows at the end of every quarter mostly on account of redemption of fixed maturity plans. With MFs floating time-bound fixed maturity plans (FMPs) to attract investments from the corporate sector and banks, the maturity of such schemes also increases outflows. Nevertheless, quarterly outflows become inflows immediately next month in the short term MFs schemes.

The corporate sector has 46.48 per cent shares in the Mutual Funds AUM of Rs 614,547 crore as per the AMFI data dated March 31, 2010. Of the total exposure of the corporate sector, almost 68 per cent (Rs 193,383 crore) has been parked in debt schemes which has maturity period up to 3 months. Banks and financial institutions, however does not have very high exposure (Rs 48,800 crore) in mutual funds. Of the total exposure Rs 30,800 crore has been for short term duration.

So, outflows in the mutual funds schemes may not be entirely withdrawal, but on account of an unavoidable redemptions. The following quotes for June 2010 outflow become factually incorrect when an expert say, “The combined effect of banks withdrawing funds from mid-month itself, and corporations taking out money to meet their advance tax payment requirements, delivered a huge blow to the mutual fund industry in June”

“Usually during the quarter end, 10 per cent of the assets are pulled out by banks from liquid funds,” says …

A debt fund manager, requesting anonymity said, “Typically the money moves out toward the month end. This time it moved out in the middle of the month and hence the outflow was seen”.

Asked when these funds would return to the industry, the fund manager said, “The money will come back if the liquidity turns positive money. But will it come back. My guess is a large part may not come back at all. The assets will not go back to May level.”

There was sensible quote which say “Also, the usual quarter-end phenomenon had an impact on treasury management schemes, as normally companies tend to spruce up balance-sheets ahead of every quarter”.

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