The mutual fund industry has suffered an erosion of a whopping Rs 1 lakhcrore during the month of March alone due to huge redemptions from banks andinstitutional investors in liquid and money market funds.

The total investments of the fund industry in debt papers like certificate ofdeposits (CDs), commercial papers (CPs) and collaterised borrowing and lendingobligations (CBLOs) stood at around Rs 1,84,000 crore at the end of February.Industry experts said that, by March-end, this corpus had depleted by over 50per cent.

* The total investments of the fund industry in debt papers and CBLOs stood ataround Rs 1,84,000 crore at the end of February

* Industry experts said that, by March-end, this corpus had depleted by over 50per cent

*By April 10, the funds will start parking fresh capital into debt papers intenures ranging from 90 days to six months

“The industry would have lost around Rs 1 lakh crore as banks and institutionsredeemed their investments during the last week of March,” said JaideepBhattacharya, chief marketing officer, UTI Asset Management Company.

Over80% of funds to come back

However, fund managers believe that at least 80 per cent of this amount wouldcome back into the system by April 10, as the funds would start parking freshcapital into debt papers like CDs and CPs in tenures ranging from 90 days tosix months.

Most of these investments will be allocated under liquid and money market fundswhere institutional investors own over 80 per cent.

“Investors, who take out money from liquid and money market schemes, reinvestit mostly through the same schemes in the first two weeks of April. Going bythe exact nature of these reinvestments, these schemes may also have to buyshort-term papers like CBLOs and repos, apart from renewing investments in CDsand CPs,” said Sundeep Sikka, chief executive officer, Reliance Mutual Fund.

Investments in CDs and CPs are linked to the liquidity situation of the issuersof these instruments. Following the series of rate cuts by the central bank,the industry believes that the banks are flush with liquidity and the number ofCD issuances may consequently come down as the banks do not feel the need toraise capital through these debt papers.

Also, as the demand for such investments shot up, the rates offered by CDs havecome down, from about 8 per cent in the January-February period to about 6.75per cent now. CBLOs and repo rates are much lower at 3-5.8 per cent.