Liquid funds hit by freed savings rate

The Reserve Bank of India’s decision to allow banks to set interest rates for savings accounts may affect inflows to liquid funds.

A narrowing of the difference between interest rates in liquid funds and savings accounts and the preference for a traditional banking product are likely to hit inflows into a category where retail investors account for four out of five folios, say experts.

Liquid funds are mutual fund products which invest money in short-term instruments and are a  popular avenue for individuals and institutions to park excess cash.

The liquid fund category has given average returns of 8.2% over the last one year, according to data from Value Research, an independent provider of mutual fund data and investment information. Meanwhile, savings accounts gave returns of 4%.

These funds would be impacted by a reduced difference between savings bank interest rates and those of liquid funds after the RBI de-regulated the savings account deposit rates on Tuesday, said Paul D Souza, who runs Cuzzins Investment Services.

“Savings rates will go up as banks compete among
themselves. As the difference in returns shrinks, investors may prefer to forgo incremental returns in liquid funds for the comfort of a savings bank account. This is likely to result in large outflows,” he said.

Yes Bank has already increased its savings account rate by 200 basis points to 6%.

The de-regulation of savings account deposit rates may take away one of the two chief reasons that people invest in liquid funds, said Suresh Sadgopan, principal financial planner at Ladder 7 Financial Advisories.

“The effect won’t be immediate but there will be an impact on the liquid funds. The interest rate arbitrage between low savings rates and liquid fund returns would no longer be there though the tax advantage would still remain,” he said.

Comfort is another reason for investors to prefer banks say experts.

Currently, investors may have to wait for days to access cash parked in most liquid funds on account of the time required for processing of redemption requests and credit of the money to one’s bank account.

Many investors may prefer the comfort of a savings account where cash is only as far away as the nearest ATM (automated teller machine), said experts — especially if returns are only marginally higher in a liquid fund.   

While the existing base may not be impacted, additional inflows could become more difficult say fund managers.

“Incremental inflows are likely to be impacted more than the existing base,” said Dwijendra Srivastava, head of fixed income at Sundaram Mutual Fund.

The impact on overall assets managed by mutual funds would be limited said Rahul Pal, Head-Fixed Income at Taurus Mutual Fund.
“The amount coming in from retail investors is a small portion of the liquid fund assets.” he said.

Retail investors account for 80.26% of the total investor accounts or folios in liquid funds, according to data from the Association of Mutual Funds in India, an industry body for mutual funds.

In terms of assets their share is Rs.827.15 crore out of a total Rs.1.28 lakh crore with the bulk of capital coming from high-ticket banks and institutional investors.

The total assets under management for mutual funds stands at Rs.6.41 lakh crores, according to AMFI data at the end of September.