The industry had witnessed heavy redemption pressure, starting October 2008 when most of the debt funds saw a pullout due to the liquidity crisis and many funds were in a fix due to asset and liability mismatches. The Reserve Bank of India had to intervene and ask banks to step up their lending to the sector.

According to Crisil director Pawan Agrawal, “Crisil has also witnessed an increased preference by mutual funds for lower credit risk with a preference towards government securities and AAA or P1+ rated instruments”. According to K Ramakumar, head (fixed income) at Sundaram BNP Paribas mutual fund, “After the debacle in the last year, fund houses have slowly started investing in government securities.”

Financial sector entities, especially banks, continue to dominate the portfolio, constituting two-thirds of the assets under management AUM, Ramakumar adds. However, within financial sector, there is a clear shift towards investments in instruments issued by banks as compared to that of non-banking financial companies (NBFCs).

While the overall exposure to financial sector remained stable, mutual funds' exposure to banks has increased to over 50% from 43.3% as on August 31, 2008. On the other hand, exposure to NBFCs has come down to just above 8% from almost 18% during the same period.

Most of problem was created as a large number of funds had lent to the real estate sector and in pass through certificates (PTCs). These are instruments issued by banks, securing a loan that they have offered to a single corporate entity. And when the redemption pressure started due to the liquidity crisis, mutual funds were in a fix.

Now, with the new guidelines issued by the Securities and Exchange Board of India (Sebi), capping the maturity of investments in liquid schemes, also helped streamline the portfolios with proper asset liability matches.

“Exposure to pass through certificates (PTCs) and real estate sector has also come down sharply because of the illiquid nature of the instruments and their increased credit risk.” The combined exposure of Crisil-rated schemes to PTCs and real estate companies declined to 3.6% from 16% as on August 31, 2008.