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Overnight schemes are effectively zero-risk products, says Anju Chhajer, senior fund manager, Reliance Nippon AMC

The recent downgrades and defaults in the debt mutual fund space have shaken the confidence of many investors in liquid funds. Some of them have taken refuge in bank deposits, while some are shifting to overnight funds in search of safety of their short-term investments. Shivani Bazaz of spoke to Anju Chhajer, Senior Fund Manager, Reliance Nippon Life Asset Management, to find out what is happening on the ground.

Many conservative debt investors do not consider liquid funds safe anymore. The recent downgrades and defaults seem to have shaken their confidence in these schemes to park money for a short period. How do you view the scenario?

Recent downgrades and defaults have impacted the confidence of investors. Some investors have shifted to bank FDs and overnight funds till the environment stabilises. The portfolios of liquid funds have been further aligned in recent times, duly recognising the changed credit environment and investor apprehensions. The key aspect of safety, liquidity and returns (SLR) has been a key feature of liquid funds, which has been further re-emphasised through these steps. The recent regulatory announcements will further strengthen this framework. We are seeing a trend back into liquid funds, as investors get more comfortable with the profile and risk management practices in these funds.

Mutual fund advisors are asking their ultra conservative investors, who do not want to take any risk in their short-term investments, to shift to overnight schemes. Do you think that is a wise move?
The risk in liquid fund is minimal, compared to other debt schemes. But overnight schemes are effectively zero-risk products. The return differential between the two products in past one month has been as high as 100 bps (100 bps = 1 per cent). If the investor is not willing to take the minimal risk of liquid fund, overnight funds are good alternative to deploy very short term liquidity.

Sebi changed many investment norms of liquid funds after the recent troubles in the debt mutual fund space. Do you think the changes have made liquid funds safer?
The credit track record of liquid funds through various cycles has been excellent. The recent regulatory changes, including further tightening on sector concentration, minimum 20 per cent allocation to sovereign instruments, will further strengthen the superior credit risk and those carrying the DRD4 gene are more likely to take risks for these products.

Many debt mutual fund managers and advisors say these norms will also make liquid funds volatile and their NAVs may swing widely now. What is your view?
The two major changes driving this view are : one, the portfolio will be fully marked to market. All instruments with more than 30 days maturity are already MTM currently, and even for 0-30 day maturities, fair valuation guidelines are applicable. Two, the product will have exit load if someone redeems within seven days.

The new changes potentially increase the requisite holding period for investors. This in turn will bring stability to the liquid fund AUMs. Investors with very short term (less than seven days) investment horizon will move to overnight funds. The AUM stability gives flexibility to portfolio managers to maximise the efficiency of the portfolio by selecting the most appropriate investments in the 0-90 day maturity bucket. A 45-60 day average maturity product, will also ensure minimal volatility over a 15-30 day holding period return. While daily returns may see incrementally higher volatility, it will get more than evened out over investor holding period and give them better potential returns.

Even though liquid schemes carry the least amount of risk, they are not entirely free of risk. What are the kind of risks that investors should always factor in when they choose a liquid scheme?
Liquid fund carry the least amount of duration risk as the fund invests in up to three month maturity money market instruments like treasury bills, bank certificate of deposits and commercial papers. This virtually eliminates any interest rate risk even for very short investment horizon, even in volatile markets.

The base credit profile is very high grade further bolstered by very short term nature of these exposures. This also allows the schemes exit exposures on any signs of deterioration in credit quality of issuer. To reiterate, the product offers efficient returns, with minimal risk even for short term investment horizons.


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