Banks, especially from the public sector, are working out credit lines to support mutual funds (MFs), which are currently up against year-end redemption pressure. This comes in the backdrop of high volatility in the financial markets triggered by the COVID-19 pandemic.
With the equity markets yo-yoing and bond yields spiking, mutual funds are finding it difficult to liquidate their investments to meet redemption pressure as the markets have turned shallow. Mutual funds generally face redemption pressure every quarter end as institutional investors such as banks and corporates redeem their investments to shore up their quarterly financial results.
“There is a lot of demand for funds from mutual funds. We are trying to provide liquidity to the system wherever it is required…..Credit lines can ease their redemption pressure,” said Rajkiran Rai G, Managing Director & Chief Executive Officer, Union Bank of India. Rai observed that mutual funds are usually able to meet year-end and quarter-end redemption pressures by liquidating their securities ― equities, bonds, and certificate of deposits, among others. But this time around, even if they want to sell the securities, there is no market to absorb them. “The redemption pressure will be there for a short period. Once this is taken care of (by the mutual funds), things will normalise. Public sector banks are having good liquidity and we are supporting,” said the Union Bank chief.
Underscoring the dramatic jump in yields in the money and bond markets in the last fortnight or so, Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said yields on certificate of deposits (CDs) have jumped about 200 basis points and on corporate bonds about 100 basis points. “We are maintaining enough liquidity. But in the current situation, if some big redemption comes, whom will we sell (the corporate bonds and CDs) to? Somebody has to buy from us,” he said.
To help mutual funds get over the redemption bump, Irani felt that either the Reserve Bank of India should open a liquidity window (like it did during the 2008 global financial crisis) or market regulator SEBI should freeze redemptions for 10 to 20 days.