After demonetization, banks were flush with cash and cut Fixed Deposits and SB Account rates. Citizens rushed to invest in mutual funds and the Government launched an initiative called Mutual Funds Sahi Hai, to educate the common man on the benefits of investing in mutual funds.
Money flowed out of FDs as people rushed to invest in mutual funds. As petrol and diesel prices increased owing to high Crude Oil prices, inflation picked up. RBI raised the repo rate from 6% to 6.5% and banks hiked fixed deposit and home loan rates. Citizens showed interest in FDs again.
The stock markets have crashed in recent times. The IL&FS fiasco wiped out nearly a year’s gains in liquid funds. ICRA downgraded the commercial papers of IL&FS from A1+ to D. This created a liquidity crisis in NBFCs owing to Asset Liability Mismatch (ALM). What is asset liability mismatch? NBFCs borrow short-term and lend long-term. This is great when interest rates are low, but are a problem when interest rates rise. (Do remember the cost of funds is higher for NBFCs than banks).
Shock waves are spilling into the glamorous World of Television. Subash Chandra’s Zee Enterprises Limited is feeling the heat after IL&FS sudden $12.8 Billion bankruptcy. Dr Subash Chandra the founder of Zee Enterprises Limited, controls 41% of the Company. Dr Subash Chandra heads the Essel Group. The overall group has a debt of around Rs 20,000 Crores. Subash Chandra pledged shares to finance unrelated businesses, which he later claimed in an open letter to be a mistake. Lenders who had given money to Zee entities sold shares to safeguard money. As shares of Zee group crashed, more than Rs 13,000 Crores of market capitalization was wiped out. This brought the entire loan against shares business under a glare.
DHFL group is staring at a crisis after the group was accused of siphoning Rs 31,000 Crores of public money by news portal Cobrapost. The news portal claimed loans sanctioned to DHFL were taken out of India by the Wadhawans.
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Let’s take a look at the mutual funds with the highest exposure to Essel Group, Dewan Housing and IL&FS. According to fund houses and credit rating agencies, mutual funds have an exposure of more than Rs 17,000 Crores to these 3 entities.
The DHFL mess is quite big as it is a big borrower from mutual funds with an exposure of around Rs 8,500 Crores. (This is as of December 2018). Reputed mutual funds like UTI Mutual funds, Reliance AMC, Axis AMC and Franklin Templeton have a high exposure to DHFL. This is causing an aversion to debt funds.
Aditya Birla Sun Life Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund and Franklin Templeton along with SBI Mutual Fund and Baroda Mutual Fund have a high exposure to Essel Group.
ICRA has placed 6 mutual funds under rating watch over IL&FS exposure. HDFC’s and UTI’s banking and PSU debt funds, UTI’s bond and dynamic bond fund, HDFC’s short-term debt fund and Aditya Birla Sun Life’s short-term opportunities fund are under rating watch.
All this has made stock market investors really scared as they stick to a few good names. Money is rushing out as many investors head back to beloved FDs.
The Government in the recent Budget made FDs an attractive investment. Piyush Goyal in the Interim Budget made a proposal to hike TDS on interest earned from bank fixed deposits and post office deposits from Rs 10,000 a year to Rs 40,000 a year under Section 194A. TDS on senior citizens interest income from bank fixed deposits and post office deposits stays at Rs 50,000 a year. Now, more citizens will invest in bank FDs.
Let’s assume 7.5% rate of interest on an average in bank FDs. On an average a term deposit holder would accrue interest income of Rs 20,000 a year. Now he/she had to pay TDS of Rs 10,000 on interest income. After the Finance Minister’s new proposal to raise TDS limit on interest income to Rs 40,000, it’s a big relief to FD investors. This helps small investors with term deposits up to Rs 5 Lakhs. This will definitely boost demand for fixed deposits in India.
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