Overnight schemes gain traction as Sebi tightens norms on liquid funds

Overnight schemes – those that invest in papers with maturity of as short as a day – are gaining traction as institutional investors are increasingly viewing it as a better alternative

Fund managers say risk-reward is no longer in favour of liquid schemes. “Portfolio yields on liquid schemes are about 5.7 per cent, which is marginally higher than overnight schemes’ 5.2 per cent,” said one fund manager. From June to August, overnight schemes’ average AUM moved from Rs 12,574 crore to Rs 20,717 crore; a jump of 64 per cent. This coincided with Sebi’s move to introduce a slew of tighter norms on liquid schemes. Fund managers said that as these norms get implemented, overnight schemes are likely to become even larger.

“While returns on liquid schemes will moderate further due to mandatory allocation to less-risky govt papers, MTM valuations can lead to episodes of volatile returns,” said another fund manager. Sebi norms make it mandatory for liquid schemes to park 20 per cent of their corpus into G-secs, while overnight schemes can invest the entire corpus in collateralised borrowing and lending instruments.

Industry sources say institutional investors — such as banks and non-banking lenders — looking for daily liquidity are likely to move their allocation to these schemes. Graded exit load on less than 7-day money, is also likely to deter these investors from liquid schemes.