A record 2.1 trillion flowed out of liquid and money market funds in September, shows data collated by the Association of Mutual Funds in India (Amfi). In end-August, the total assets under management in this category stood at 6.04 trillion.

Before jumping to any conclusion, it must be noted that part of the outflows may be related to the previous month, but were included in the September figures because of an accounting quirk.

According to the chief executive officer of one of India’s largest mutual fund companies, outflows pertaining to the last day of August seem to have been accounted for in the month of September by Amfi. This typically happens when the last working day of a month is followed by a holiday, he added.

To be sure, there were unusual net inflows of 1.7 trillion in August, which was again a record for the segment. But even assuming that this was the case, outflows would still be very high in September.

Another reason cited for the higher-than-usual outflows is that companies typically park funds in liquid funds ahead of making advance tax payments in September.

Ananth Narayan, associate professor (finance) at SP Jain Institute of Management and Research, says: “Even after adjusting for the quarter-end phenomenon and other reasons being given, the net outflows from liquid funds in September look large. This isn’t surprising, since the IL&FS (Infrastructure Leasing and Financial Services Ltd) default did cause a tremor, which would have led to panic redemptions. Liquid funds are held by large investors who could worry that during times of stress, those that exit first may be better placed than those who stay."

Mutual fund executives have tried to downplay the role of panic redemptions owing to fears of defaults and a liquidity crisis. They said overnight rates and money market rates in general barely moved in conjunction with the large outflow numbers reported by Amfi.

“The reason the large outflows aren’t reflected in overnight rates and other money market rates is that the central bank flooded banking money markets with liquidity to quell fears related to liquidity. As such, the outflows may have lasted for only about a week," says Narayan.

In any case, the fact that there was panic soon after the IL&FS default can’t be denied. News emerged that a large mutual fund sold debentures of a housing finance company at an unusually high yield. This, in turn, led to a a sharp fall in the equity valuation of all housing finance companies. But the incident made it clear that at least some funds were facing redemption pressure in September.

With investors having lost money in some liquid funds as well, owing to their exposure to IL&FS, it will be interesting to watch how flows shape in the coming months.