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MFs gear up for redemption as advance tax date nears
June, 07th 2007

With the date for the payment of advance tax (June 15) nearing, mutual fund (MF) managers are gearing up to tackle redemption pressure mostly from corporate and institutional investors. The fund managers, however, opine that it is a regular phenomena and they are ready to tackle the situation.

Last year, in June 06, MFs witnessed an erosion in their assets under management (AUM) to the tune of Rs 11,089.84 crore or 4.02% of the total AUM of Rs 2.64 lakh crore. The AUM of the MF industry stood at Rs 2.75 lakh crore in May 2006.

Similarly the year before that, in 2005, AUM of June 05 was at Rs 1.64 lakh crore. The AUM had come down by 2.05% or an erosion of Rs 3,443.66 crore from the AUM of May 05, which stood at Rs 1.67 lakh crore.

Optimistic that the similar trend will not be followed this year, Gordon Rodrigues, senior VP and head fixed income HSBC asset management company (AMC) feels that advance tax outflows will not result in much redemptions from the funds as most of the large corporates tend to plan their tax payments through the fixed deposit route, with deposits maturing in line with the tax dates. One does tend to see this more for the second rung corporates, but the amounts are not significant. However, we find that redemption pressure tends to build up substantially in the week prior to the quarter-end as most large banks and financial institutions tend to withdraw their investments for the quarter end date, being a financial disclosure date. They then tend to come back in the week following the quarter end, he said.

Dheeraj Singh, head, fixed income, Sundaram BNP Paribas said, There will definitely be some outflows. However, it will not be like the previous years where there were huge redemptions. Fund managers are now aware of it and are now much better prepared to tackle the first installment of advance tax. Last week, when call money rates fell to 0.1% levels, MFs saw large inflows into their liquid funds from the banking sector, as the return by investing in MFs is far superior than lending into call money market. This also means that once call money tightens and we near the end of the quarter redemption pressure will be even more exaggerated to that extent, said a fund manager.

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