Returns on liquid funds have slumped over the past few months, with 1-year returns now at 3.4 per cent — among the lowest in the past two decades — and below the short-term interest rates offered by several banks on fixed deposits.
 
This will especially hurt institutional investors, who contribute an estimated 80 per cent to assets of such funds.
 
There is excess liquidity in the system following the supportive action by the Reserve Bank of India (RBI), with reverse repo rates at 3.35 per cent, and this is being reflected in the returns of liquid funds, said experts. 
 
“Returns are likely to remain at current levels as it is clear that the RBI is in no mood to increase rates. There is surplus liquidity and there is no credit pick-up, and I do not think money market yields will go up sharply in the next few months,” said Mahendra Jajoo, Chief Investment Officer (fixed income) at Mirae Asset AMC.