Liquid funds likely to see further investor pullouts in coming months

Liquid funds, which had seen sharp outflows in June, are expected to see further investor pullouts in the coming months. According to a Crisil report, investor allocation is likely to move towards other debt schemes such as ultra short duration and overnight schemes, following the new valuation norms laid down by the Securities and Exchange Board of India (Sebi).

“Institutional investors — which are the biggest investor segment of the funds — 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 or overnight funds in the lower investment horizon. The latter carry the least interest rate risk,” the Crisil note pointed out.

In June, liquid funds saw a net outflow of Rs 1.5 trillion, which led to the schemes' assets dropping by 27 per cent to Rs 3.9 trillion. According to fund managers, the June ouflows were mostly on account of the quarterly redemptions made by large-ticket investors such as corporates and banks to meet their advance tax requirements. “Historically, these investors tend to invest back into the liquid schemes after meeting tax requirements. However, this trend may change in July given the new valuation norms,” said a fund manager, requesting anonymity.

To improve the transparency and ease the velocity of inflows and outflows in liquid schemes, Sebi had introduced certain changes at its recent board meeting. The market regulator stated that valuation of debt securities will be fully mark-to-market and amortisation will no longer be allowed. In another move, a graded exit load was proposed for investors redeeming their investments in less than seven days.

Analysts say that discontinuing the practice of amortisaion, will reduce attractiveness of liquid schemes as the category returns may see increase in volatility.

At the same time, certain fund managers are of the view that the move is in the right direction as there were instances of same debt papers getting valued differently by different fund houses as amortisation allowed some flexibility.

“Bringing mark-to-market for all securities will make sure that the risk is transparently reflected in all schemes’ NAV on a daily basis,” said Mahendra Jajoo, head-fixed income, Mirae AMC.