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Debt funds face redemption pressure

Aabhas Pandya

Even as equity funds continue to wilt under bear assault, debt funds have come under severe redemption pressure from corporate investors in the month of March with an estimated outflow of Rs 2,600 crore. This translates into a little over one-fourth of the total assets of Rs 10,000 crore managed by open-ended, medium-term debt funds. The redemption pressure led to an aggressive selling by mutual funds in the corporate debt and government securities market, leading to a fall in prices to the tune of 50-60 paise towards the long-end in March. However, prices have now bounced back and are close to their February levels after the cut in CRR and bank rate. "The last week of March was a sellers' market,'' quips a fund manager. In fact, most of the dedicated debt funds ended with a negative return for March.

The latest in the list of corporates is Morepen Laboratories, which redeemed its investments of Rs 120 crore in debt funds on April 4. Among other companies believed to have redeemed their investments in debt funds are Maruti Udyog (Rs 450 crore), ICICI Banking Corporation (Rs 225 crore), ICICI Venture Fund (Rs 275 crore), The Stock Exchange, Mumbai (BSE) (Rs 780 crore), IDBI Bank (Rs 180 crore), Hero Honda (Rs 60 crore) and Hindalco (Rs 500-550 crore). Hindalco has reportedly pulled money from debt funds to fund its acquisition of Alcan's stake in Indal.

Fund managers say corporates were redeeming their investments in debt funds since they plan to declare an interim dividend before the imposition of a higher dividend tax of 20 per cent. Besides, corporates wanted to book profits on their investments and show in their balance sheets for the year ended March 31, 2000.

With the economy showing signs of picking up, corporates also need money for their capital expenditure requirements. "Companies are now looking at various resources for their capex programmes and those corporates with investments in debt funds are now pulling out money,'' says a fund manager. "Some corporates had also shifted their money from debt funds to banks in order to oblige the latter since it beefs up their deposit base before the end of a financial year,'' he adds. Although corporates normally avoid putting money in equity funds, industry experts say some corporates and high net worth individuals may sell their debt fund investments to cover some of the losses in equity funds.

However, contrary to the general perception, corporates are not exiting debt funds on account of the 22 per cent dividend tax since it is still lower than the 38.5 per cent tax on their interest income from other debt instruments. Besides, investors have the option of shifting their investments to the growth option.

Debt funds were also selling paper in the market to augment reserves for dividend payouts. As many as 23 debt and government securities funds declared dividends in the month of March. Debt funds (other than gilt schemes) were aggressive sellers in government securities since they currently hold an average of around 30 per cent of assets in government securities. Owing to a dynamic gilts market, funds are able to sell their gilt holdings at minimum impact cost. Debt funds had increased their exposure to gilts due to convergence of yields of triple A corporate paper and government paper and a consistent softening of interest rates since late last year.

Mutual Funds

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