Higher interest than Fixed Deposit: Is this why investors are parking more money in Liquid Funds?

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Liquid Funds along with Ultra Short Durations funds were among the top three categories with net positive flows in August under the Fixed Income/Debt mutual fund segment. Both these schemes witnessed a very big jump in net flows in August compared to July.

The net inflow in Liquid Funds in August was Rs 50,095 crore while the net asset under management (AUM) of this category increased to Rs 411,291.99 crore. The net inflow in Ultra Short Duration Fund was Rs 6272.41 crore while the AUM of this category increased to Rs 97575.87 crore, according to Association of Mutual Funds in India (AMFI) data.

Interestingly, the net flow in the Liquid Funds in July was negative at -7692 crore rupees while the net flow in the Ultra Short duration fund was just Rs 3728.02 crore.

Better than FD?

Experts suggest investors are favouring liquid funds over Debt funds in the Fixed Income category because of interest rate hike expectations from RBI and better returns than traditional instruments like Fixed Deposits. However, this may be a temporary trend.

“On the Debt schemes, investors are preferring liquid funds over interest rate sensitive fixed income schemes, owing to RBI’s policy to contain inflation and hence tighten liquidity. Flows will come into Debt schemes once RBI revises its stance to accommodative,” N S Venkatesh, Chief Executive, AMFI said in his comments on August data via email.

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Investors have been parking their money in short-term debt instruments as opposed to longer-term instruments owing to multiple reasons.

“Considering that the interest rate is on an upward trajectory, investors prefer to park their money in these short-term instruments considering that they are likely to earn a higher rate of interest as compared to other traditional investments like a fixed deposit,” said Kavitha Krishnan, Senior Analyst – Manager Research at Morningstar India.

“Moreover, short-term instruments offer the flexibility for an investor to be able to move into equity or invest in other instruments in a staggered manner by parking their money in liquid/short-term funds. A lot of companies and investors could also be parking their money in short-term funds in preparation for making the advance tax payments in September,” Krishnan added.  

Liquid Fund Returns

Data on the AMFI website shows that the 7-day returns of most of the liquid funds have been around 5.5% to 5.79% (as of 9th September). The 7-day returns of most of the Ultra Short duration bonds were between 5% to 7.4% while the monthly return was up to 6.5%. (Check top bank FD rates)

Disclaimer: Mutual Fund investments are subject to market risks. There is no guarantee that a fund can repeat its past performance in future. Please consult your financial advisor before making any investment decision)

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