15 Nov Windfall for Mutual Funds: Demonetisation
Anywhere between Rs 8-12 Lac could come into the banking system in the next few weeks.
It is estimated that the total value of currencies in the Rs 500 and Rs 1,000 denominations at the end of March 2016 was about Rs 14.3 Lac Crores. Depending on the quantum of black money, anywhere between Rs 8-12 Lacs could come into the banking system in the next few weeks. Of this, a small portion, estimated at about Rs 50,000 crore could flow into the debt schemes (mostly liquid schemes) of mutual funds over the next two months, said experts.
Liquid funds invest in securities with a residual maturity of up to 91 days, primarily in money market instruments like certificate of deposits, treasury bills, and commercial papers. Banks and companies are the major investors in liquid funds, contributing over 90% to the assets of these schemes. In 2011, the Reserve Bank of India (RBI) had instructed banks to limit their investments in liquid schemes to up to 10% of their net worth. As of October 31, liquid funds contributed Rs 2.7 Lac Crores of the Rs 16 Lac Crores AUM of the MF sector.
According to experts, only the larger banks have been investing significantly in mutual funds in recent months; now, the smaller banks could also increase their investment following the liquidity spike.
Demonetisation could also indirectly help the mutual fund sector by increasing the quantum of savings coming into financial assets. Since demonetisation is expected to improve the government’s fiscal situation and ease inflation, interest rates may decline over the next one year. “As tax compliance improves and bank deposit rates decline, more investors will look at investment avenues such as mutual funds,” said Srivastava.
Experts believe that the demand contraction into key sectors such as real estate and other products and services will result in a decline in credit off-take for banks. This, in turn, will push them to look at alternative sources of income such as third party products. “An estimated Rs 5-7 Lac Crores is expected to come into the financial system in the next two months and 25-30% of this might make its way into mutual funds over the next six months owing to the push from banks for higher revenues from third-party products and the decline in interest rates,” said Himanshu Vyapak, deputy CEO, Reliance Nippon MF.
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