Liquid funds along with ultra-short duration funds were among the top three categories with net positive flows in August in the fixed income/debt mutual fund segment. These two programs experienced a very strong increase in net flows in August compared to July.
The net inflow of liquid funds in August was Rs 50,095 crore while the net assets under management (AUM) of this category increased to Rs 411,291.99 crore. According to data from the Association of Mutual Funds in India (AMFI), the net inflow into the Ultra Short Duration Fund was Rs 6272.41 crore while the AUM of this category increased to Rs 97575.87 crore .
Interestingly, the net flow into the liquid funds in July was negative at Rs -7692 crore while the net flow into the ultra-short duration fund was only Rs 3728.02 crore.
Better than FD?
Experts suggest that investors prefer cash funds over debt funds in the fixed income category due to RBI’s expectations of higher interest rates and better returns than traditional instruments like fixed deposits. However, this may be a temporary trend.
“On debt schemes, investors prefer liquid funds over interest rate sensitive fixed income schemes, due to RBI’s policy of containing inflation and hence tightening liquidity. Flows will enter debt programs once RBI revises its stance to become dovish,” AMFI chief executive NS Venkatesh said in his comments on the August data via email.
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Investors have put their money into short-term debt securities rather than longer-term instruments for multiple reasons.
“Since the interest rate is on an upward trajectory, investors prefer to put their money in these short-term instruments because they are likely to earn a higher rate of interest compared to other traditional investments like a fixed deposit,” Kavitha said. Krishnan, Senior Analyst – Head of Research at Morningstar India.
“In addition, short-term instruments provide the flexibility for an investor to be able to switch to stocks or invest in other instruments on a laddered basis by placing their money in liquid/short-term funds. Many companies and investors might also put their money in short-term funds for early tax payments in September,” Krishnan added.
Liquid fund returns
Data on the AMFI website shows that 7-day returns for most liquid funds have been around 5.5% to 5.79% (as of September 9). The 7-day yields of most ultra-short duration bonds ranged between 5% and 7.4%, while the monthly yield reached 6.5%. (Check Best FD Bank Rates)
Disclaimer: Investments in mutual funds are subject to market risk. There is no guarantee that a fund can repeat its past performance in the future. Please consult your financial advisor before making any investment decision)