IT companies dump MFs for bank fixed deposits

Top tier Indian IT firms with loads of surplus cash has been logging out of mutual funds (MFs) over the last one year, preferring to invest, instead, in fixed deposits (FDs) with Indian banks.

India’s largest IT services exporter TCS has increased its exposure in FDs from R3,531.31 crore in March 2010 to R6,061.70 crore as on March, 2011. Consequently, the firm has reduced its exposure in MFs from R2,459.44 crore in March last year to R343.24 crore by March, 2011. In its annual report, TCS explains that the shift was in line with the firm’s strategy for optimum utilisation of surplus cash.

Infosys, the country’s second largest software firm, now has about 90% of the firm’s surplus cash in FDs, moved from MFs over the last one year. CFO V Balakrishnan told FE that this was purely a yield issue.

“The returns are low in MFs while in FDs they are very high. Infosys keeps its surplus cash only in liquid MFs where returns are low – around 5-51/2%. FDs can give up to 10%,” he said.

Yields in FDs started going up last year after the RBI, concerned with high inflation, tightened monetary policy, hiking repo and reverse repo rates several times. In the second half of 2010, FD rates jumped in the range of 100-200 basis points.

A Sebi regulation last year too may have contributed to the flight of surplus capital from liquid MFs. Sebi had notified that debt and money market instruments with maturity of up to 91 days will be subject to mark-to-market norms from July 1 2010.

FE had also reported that liquid-plus schemes would become volatile depending on market swings and will no longer show consistency in increase or decrease in the net-asset value under the current amortisation method. Prior to the Sebi notification, only debt securities above 182 days of maturity were subject to mark-to-market norms.

In May this year, the RBI, in a bid to prevent a potential liquidity crisis, capped bank investments into liquid schemes to 10% of bank’s net worth as of March 31 of the previous financial year. At present, banks park 20-30% of their net worth into MF liquid schemes.

Ganesh Murthy, CFO of MphasiS, said that earlier, most of the firm’s cash went into liquid MFs. The company has now shifted a majority of its surplus money to fixed maturity plans (FMPs) that generates a better yield. “Other companies put money in certificate of deposits (CDs) with the bank, which is like a FD. FMPs also invest in CDs – ultimately, the return is the same but in the case of FMP, it will be slightly lower because you have to pay for the asset management fee. The advantage of routing it through FMP is the tax advantage. We pay tax only at 24%. In CDs, where you invest directly, you have to pay tax at the rate of 33%,” he said.

The shift in MphasiS, which has $422 million in cash, has happened over the last one year. “In liquid MFs, you will get 6-7% return. But in CDs, you can get up to 9-10% returns,” the CFO added.

An executive from Wipro, who did not want to be identified, said that investments are normal economic decisions.

“We always had both FDs and MFs. It is more about which instrument gives you the best return at a particular point in time. All these instruments are more or less similar in risk. You keep moving the funds based on yields. If interest rates decline, MFs will become attractive once again,” he noted.

Source: http://www.financialexpress.com/news/it-companies-dump-mfs-for-bank-fixed-deposits/809459/0