The Reserve Bank of India on Tuesday put a limit on how much banks can invest in liquid and short term schemes of mutual funds, a decision that can impact adversely the assets under management (AUM) of fund houses that rely heavily on money flows from banks.

The central bank said that a bank can invest up to 10% of their previous year's net worth in "liquid/short term debt schemes (by whatever name called) of mutual funds with weighted average maturity of portfolio of not more than one year."

Not to disturb the fund industry, RBI said that banks which had more than 10% of their net worth invested in these schemes, are now "allowed to comply with this requirement at the earliest but not later than six months" from the date of notification.

In its annual policy statement on May 3, the central bank had announced to move towards such a limit. There was no such limit fixed earlier.

The mutual fund industry is expected to witness some redemptions in liquid funds on the back of RBI's decision. However, industry players feel that the central bank's decision will strengthen the money market by forcing banks to participate more in this segment, which is currently dominated by mutual funds.

According to current estimates, liquid funds--schemes with up to 90-day maturity-manage about Rs 1 lakh crore of banks' funds. The RBI decision is expected to take out about 50-60% of this, which is about Rs 50,000 crore to Rs 60,000 crore, from the fund industry. While this would surely dent the total AUM of mutual funds, on the positive side, fund houses barely earn anything from liquid funds, industry players pointed out.

So the dent of AMC's topline and bottomline would be minimal.

Additionally, top fund managers also said that since every quarter, usually around the time corporates have to pay advance tax, banks take out huge money from liquid schemes, leading to substantial volatility in the net asset values (NAV) of liquid and short term schemes. Under the changed scenario, lower volume of funds in liquid funds would lead to lower volatility in the NAV of these funds, which is good for the industry as a whole, they said. (times of india)