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BW Businessworld

Keeping It Short And Sweet

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In the global financial markets, debt funds are a very big chunk. While equity assets amount to about $40 trillion, and the bond market accounts for $92 trillion, derivatives such as futures, options and others account for $792 trillion. The largest players in the debt markets are institutions (banks, insurance companies and pension funds), most of whom are in the overnight markets and manage liquidity and cash flows. The same is not necessarily true in India, of course.

Against this background, a prudent and well- timed liquidity assessment of investors has made BNP Paribas Overnight Institutional Fund this year's winner in the best debt liquid fund category. The product has been in the market for almost six years, returning close to 6.78 per cent for three years; its average assets under management (AUM) as on 31 December 2010 is about Rs 891.30 crore.

Meet Alok Singh, fund manager since 2007, whose skills have generated these returns. "What we have done differently is to understand our clients and their cash flow requirements," he says. "It's about having foreknowledge of when they will need the money and make the funds available to them at the right time, without putting your assets under stress."

For instance, around March, at the end of the financial year, liquidity is invariably tight, and Singh takes care to arrange for liquidity. "True, it is not the most foolproof method. It is based on estimates. But it's better than not knowing."
Singh is cautious about client concentration in the fund. "Average client size is about 5-6 per cent," he says. That is, no one client has too large a share of the fund, and risks are minimised.

               Top 3

1 BNP Paribas Overnight Institutional 5.79%*2 Sahara Liquid Variable Pricing 5.47%*3 Birla SunLife Floating Rate ST Inst 5.38%*
                *18-month return 

Like other debt funds, Singh shuffles a mix of certificates of deposit (CDs) and corporate commercial paper (CPs) to stay ahead of the market. "In the past six months, we have concentrated more on CDs, because liquidity has been tight and CD rates are moving up fast," says Singh.
How well has this strategy worked? One-year returns were 6.18 per cent, while competitor funds averaged 5.68 per cent (even a basis point makes a difference). The fund also outperformed the Crisil benchmark index of 6.12 per cent over a three-year period, with a 6.78 per cent return.

He is clear about the importance of churning the portfolio and feels that to get higher returns, the mix of underlying paper has to be moved around. "There is nothing else you can play with; there is no duration play, there is no credit play per se because these are short-term funds."

But, of course, this mix changes with time; if Singh sees liquidity increasing tomorrow and money conditions turning easy, he could reduce CDs in favour of CPs, though there is a transition time. But what about the structure of his portfolio? Here, Singh sounds rueful. "We don't have a very vibrant corporate market," he says. "Seventy to 80 per cent of the issuance in the markets happens from banks and NBFCs (non-bank finance companies); they dominate the market." So the fund is heavily invested in money market instruments and the top five holdings are mainly banks. After the global credit crisis, the mantra is liquidity.


(This story was published in Businessworld Issue Dated 28-03-2011)