After buoyant April inflows, liquid funds stare at a lull

April saw the highest-ever net inflows into liquid funds as banks and large corporates rushed to deploy the surplus funds with them to take advantage of favourable interest rate spreads.

Liquid funds saw net inflows of Rs1,47,239 crore in April 2011, taking the total assets under management (AUM) under this category to Rs2,22,395 crore as liquidity in the system improved significantly post March, which had seen the highest net outflows of Rs98,255 crore.

Experts attribute the April bounce to lower credit offtake and high government spending which results in banks parking their excess funds in mutual funds.

Usually, the month of March witnesses banks withdrawing money from liquid funds to meet their credit growth targets and boost the balance sheets while in April, as the lending is lower, the money finds its way back into mutual funds.

“Banks led investments in liquid funds in the month of April. This was due to liquidity available with them. They withdraw their investment in March and that same money flows back in April to mutual funds.” said Arvind Chari, fund manager (fixed income) at Quantum Mutual Fund.

As per the Reserve Bank of India data, they invested close to Rs1,18,144 crore in mutual funds for the fortnight ending April 22, up by 148% compared to previous fortnight.

Government spending of close to Rs1,00,000 crore in late March and early part of April would have also contributed to this surge in net inflows.

“Government spends lot of money in last week of March and first week of April. Due to this liquidity is good. In such a situation banks had parked their money in liquid funds,” said Ritesh Jain, head of investments, Canara Robeco Mutual Fund.

Liquid funds are basically ultra short-term debt funds that invest in money market instruments such as certificates of deposit (CDs), commercial papers (CPs) and treasury bills for shorter duration. These are highly liquid and can be redeemed at short notice of one day.

They have given returns in the range of 7.5-8% per annum over last six months. Some experts believe that favourable spreads would have prompted investors to park the money. While the average one month CP and CD rates in April were at 7.95% and 7.4% respectively, the overnight money rates were at 6.60%.

“There was a good spread between overnight rates and money market rates. Due to which investors had parked their money in these liquid funds,” said Lakshmi Iyer, head of fixed income, Kotak Mutual Fund.

However, going forward, these sorts of net inflows would not be seen as the RBI has put a cap on bank’s investments into mutual funds. In its policy meet on May 3, the RBI has capped bank investments into liquid schemes to 10% of the bank’s net worth as of 31 March of the previous fiscal. It is believed that currently banks park between 20-30% of their net worth in the mutual funds’ liquid schemes.

“Banks will remain invested in these liquid funds for the time being and shall gradually pull out depending upon their credit growth and other factors,” said Dhawal Dalal, senior vice-president and head of fixed income, DSP BlackRock Mutual Fund.