Low bank deposit rates push retail investors to liquid funds

From a personal finance perspective, 2016-17 was a significant year. Retail investors poured more money in liquid funds, an investment option that is generally preferred by corporates and high networth individuals (HNIs), thanks to falling returns from bank deposits.

In 2016-17, the retail portion of assets under management (AUMs) of liquid funds rose 42 percent to Rs 5,800 crore from Rs 4,100 crore in the preceding fiscal, reported Cafemutual, a portal for advisors and distributors of mutual funds, insurance and other financial products.

Liquid funds invest in securities that have a residual maturity of less than or equal to 91 days. The fall in interest rates on bank deposits was mainly due to the influx of cash triggered by Prime Minister's Narendra Modi's demonetisation decision announced on November 8 last year.

Most banks now offer around 6.50 to 7 percent for less than one-year deposit (241 to 364 days), a sharp fall from up to 8.75 percent in 2014-15 while returns from liquid funds are in the range of 7 to 8 percent per annum on an average, a tad higher from bank deposits.

"A lot of first time investors first invest in liquid funds and later invest in equity funds. They use the STP facility available in the liquid funds to enter equity markets at attractive valuations," the portal quoted Lakshmi Iyer, CIO (Debt) and Head Products at Kotak Mahindra Mutual Fund, as saying.

The trend could pick up momentum if MF advisors actively promote liquid funds as an attractive option for retail investors who accounted for a mere 2 percent of the total AUMs of liquid funds.

"With the interest rate likely to remain low, industry is likely to see higher demand for liquid funds from retail participants," Killol Pandya, Head of Fixed Income at Peerless Mutual Fund, told Cafemutual.

Data published by the industry body, the Association of Mutual Funds in India (Amfi), showed that AUMs of liquid funds stood at Rs 4,13,746 crore as of April 30, 2017, up 31.7 percent from Rs 3,14,086 crore as of March 31, 2017.

A note-worthy theme in April was the preference for bank and PSU stocks by MF managers even as they dumped IT and pharma stocks in a big way. Top 20 stock additions included HDFC Bank, ICICI Bank, Federal Bank, GAIL (India), IOC, Power Grid Corporation, BPCL and Bharat Electronics, apart from two automobile firms, Tata Motors and Maruti Suzuki India Ltd.

In a related development, DSP BlackRock Investment's president and CIO S Naganath said he has quit the organisation. He has been replaced by Kalpen Parekh who was joint president of the company.