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Home >Mutual Funds >News >Outflows accelerate from liquid, overnight funds as short-term rates stay down

Liquid and overnight funds saw huge outflows in May as short-term rates continued to stay low. The former saw outflows of 46,447 crore and the latter saw outflows of 11,563 crore. All other sub-categories of debt mutual funds saw positive flows, except for smaller outflows in corporate bond funds ( 1,468 crore) and banking and PSU debt funds ( 1,340 crore).

The average return of liquid funds and overnight funds in the past year has been 3.15% and 2.99%, respectively, on the back of easy monetary policy by the RBI. The central bank has projected inflation for FY22 at 5.1%. AMFI chief executive officer N.S. Venkatesh attributed the outflows in May to the funding requirements of corporates. Ordinarily, months such as March, June, September, and December see outflows on account of advance tax payments. But, historically, May has not seen such outflows.

A series of regulatory changes aimed at cutting risk in liquid funds is also likely to have taken a toll on returns. In 2019, Sebi made it compulsory for liquid funds to hold 20% of their assets in cash, higher than the 10% that the regulator subsequently brought in for all debt mutual funds. The regulator also stopped them from investing in paper with credit enhancements. "A lot of money went into liquid and overnight funds out of risk aversion last year when the Franklin debacle happened. The trade is now unwinding strongly. People are also moving some money from liquid funds to equity markets that are rallying strongly. I normally suggest ultra-short-duration or low-duration funds for clients who can keep money longer than six months and I also use these categories for systematic transfer plans instead of liquid funds. The yields are 0.5-1% higher," said Santosh Joseph, founder, Germinate Investor Services LLP.

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