Outflows worth Rs 1.5 lakh crore from liquid funds dragged down the mutual fund industry’s assets from a record high in May - down 6.5% to settle at Rs 24.25 lakh crore in June, as per data disclosed by the Association of Mutual Funds in India (AMFI). The liquid funds category’s assets fell 27% to Rs 3.98 lakh crore at the end of the period.
Outflows from liquid funds were primarily the seasonal outflows seen by the category in a quarter-end month such as June, as institutions such as banks and corporates redeem their investments to pay for quarterly advance taxes. The funds are typically invested back into liquid schemes once the quarter-end accounting and mandatory payment requirements have been met.
The category might see more churn going forward due to the recent regulatory amendments announced by SEBI for debt-oriented schemes, which has made valuation of debt securities to be fully mark-to-market (MTM) compared with amortisation of securities with maturity less than 30 days. The 30-day threshold was also a recent phenomenon, which the regulator had modified in June from the 60 days amortisation rule earlier. In addition, the regulator, in its recent board meeting, introduced a graded exit load on investors of liquid schemes who pull out prior to seven days.
Change in the threshold level for amortisation, from 60 days to 30 days, will have an impact on both returns and volatility of liquid funds. Institutional investors - the biggest investor segment of the funds given the stable returns offered compared with other debt categories - might look at other categories for investments. Investors with a high risk appetite might look at rebalancing their portfolios to higher-yield, higher-risk categories such as ultra-short and money market funds, which have slightly higher maturity than liquid funds, or to overnight funds in the lower investment horizon, which carry the least interest rate risk.