 "mutual funds, MFs")
Following two consecutive months of net outflows, debt funds saw a turnaround in January 2024, witnessing net inflows to the tune of Rs 76,469 crore against net outflows of Rs 75,559.9 crore in December 2023.Liquid funds recorded the highest net inflows of Rs 49,468 crore, followed by Money Market funds that saw net inflows of Rs 10,651 crore and Overnight funds with a net inflow of Rs 8,995 for January 2024.
The debt schemes recorded an inflow of Rs 0.76 lakh crore during the month compared to an outflow of Rs 0.75 lakh crore in December. The largest inflows have been in the liquid fund category. Interestingly a significant proportion of the inflows have continued to be at the shorter end of the duration. Meanwhile, the Credit Risk category continued to witness the 10th straight month of outflows," said Sanjay Agarwal, Senior Director, CareEdge Ratings.
What are liquid funds?
Liquid Funds, as the name suggests, invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. They invest in very short-term instruments such as Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity. Redemption requests in these Liquid funds are processed within one working (T+1) day.
The aim of the fund manager of a Liquid Fund is to invest only into liquid investments with good credit rating with very low possibility of a default. The returns typically take the back seat as protection of capital remains of utmost importance. Control over expenses in the form of low expense ratio, good overall credit quality of the portfolio and a disciplined approach to investing are some of the key ingredients of a good liquid fund.
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Most retail customers prefer to keep their surplus cash in Savings Bank deposits as they consider the same to be safest and they could withdraw the money at any time. Liquid Funds and Money Market Mutual Funds provide a more attractive option. Surplus cash invested in money market mutual funds earns higher post-tax returns with a reasonable degree of safety of the principal invested and liquidity.
When are they preferred?
Liquid funds are preferred by investors to park their money for short periods of time typically 1 day to 3 months. Wealth managers suggest liquid funds as an ideal parking ground when you have a sudden influx of cash, which could be a huge bonus, sale of real estate and so on and you are undecided about where to deploy that money. Investors looking out for opportunities in equities and long-term fixed income instruments can also park their money in the liquid funds in the meantime. Many equity investors use liquid funds to stagger their investments into equity mutual funds using the Systematic Transfer Plan (STP), as they believe this method could yield higher returns.
Should you invest?
Should you invest?
"If the money is needed in a few days or weeks, don't go anywhere beyond liquid funds or money-market funds. These are the only two categories where your money can be on demand, and you don't want any extraordinary return. But, we'll get some modest return and the money will be available and it will never go down in value," said Dhirendra Kumar of Value Research.
If money needed in a few weeks going up to a couple of years, for all those investors or medium term investors, consider short-term debt funds or ultra short-term debt funds only. This is because they will give you a relatively superior return.
"This is meant for all investors going from medium-term to long-term simply because you shouldn't take chances with the funds which take a call on interest rate and credit quality..If you want absolute safety, your options are liquid fund, money-market fund or deposits. I feel that money-market funds are superior to fixed deposits even in terms of safety. Sometimes they might yield a higher return or a little lower, but in terms of safety, they are higher than a bank deposit simply because the way money is invested in multiple banks, that is also spreading your risk. So on that count, I think those funds qualify as superior instruments than a single bank fixed deposit," explained Kumar.
What was the trend in January 2024?
"The primary driver behind this surge in debt inflows was the liquid fund category, experiencing a notable revival. The significant net inflows were seen in Overnight, Liquid and Money Market funds. Other categories with less than one year of maturity such as Ultra Short Duration and Low Duration funds, also experienced net inflows," said Nehal Meshram, Senior Analyst – Manager Research, Morningstar Investment Research India Private Limited.
Debt funds surprised with positive flows but have been in the negative in 3 out of the last 5 months and in 8 out of the last 13 months.
"In the last one year, the debt fund flows have gone through a typical cycle; seeing aggressive sell-off towards the end of a quarter and then picking up in the months after that. In January 2024, equity funds saw the best inflows in the last 1 year, largely thanks to a combination of robust SIP flows and, to a lesser extent, NFO flows...Among the debt fund categories that saw net outflows in January 2024 were banking & PSU funds Rs 501 Crore, credit risk funds Rs 303 crore, and medium duration funds Rs 211 Crore; all relatively tepid compared to the intensity of inflows. Most of the other debt fund categories also witnessed net selling or net buying in January 2024, but were very marginal to make a substantive difference to the flow story," said brokerage IIFL in a note.
"In the last one year, the debt fund flows have gone through a typical cycle; seeing aggressive sell-off towards the end of a quarter and then picking up in the months after that. In January 2024, equity funds saw the best inflows in the last 1 year, largely thanks to a combination of robust SIP flows and, to a lesser extent, NFO flows...Among the debt fund categories that saw net outflows in January 2024 were banking & PSU funds Rs 501 Crore, credit risk funds Rs 303 crore, and medium duration funds Rs 211 Crore; all relatively tepid compared to the intensity of inflows. Most of the other debt fund categories also witnessed net selling or net buying in January 2024, but were very marginal to make a substantive difference to the flow story," said brokerage IIFL in a note.
How to choose the right liquid fund?
"A well-performing liquid fund should beat its benchmark as well as its peer funds, but investors must also verify that the fund has done well consistently. This can be checked by looking at its past returns. You can go for a direct fund with a low expense ratio. The returns between the two options are not likely to be too different. But the difference is forward returns versus past returns. The FD guarantees a forward return where as the liquid fund can only advertise its past returns and cannot confirm a fixed rate of future return," said Adhil Shetty, CEO of Bankbazaar.
