Is it time now to move out of liquid funds?

The current pandemic situation has definitely upset even the most well-crafted financial plans. With income flows receiving a tremendous jolt, the need for contingency funds has gained significance. Liquid funds have always been considered an excellent option to park contingency funds as they provide requisite safety and liquidity to investments. In fact, at one point of time, liquid funds were giving returns that were even bet coulter than those of Fixed Deposits of banks. So, a huge chunk of investors started investing in this fund category.

But things have changed and the returns from liquid funds have fallen significantly. Investors who are currently parking their surpluses in liquid funds have been affected by the fall in returns. Many of them have begun to wonder if staying invested in liquid funds still a good option.

What really happened to Liquid Funds?

The table below gives us an overview of how liquid funds have been performing over the last six months.

The above table clearly shows that the performance of liquid funds has been diminishing since the pandemic started. The category average, which was around 6% p.a., has slipped dramatically to merely 3% p.a. These returns are equivalent to savings bank returns.

 Now let us see what really caused the fall in the liquid fund returns.

1. Since the pandemic started, there has been a tremendous increase in liquidity in the system, which has led to a huge inflow of money into the banking system. And, as there are no new projects coming up, the credit growth of banks has declined, which has led to a downward pressure on interest rates across the globe. This fall in interest rates has resulted in a drop in returns of liquid funds.
2. The above mentioned flush of liquidity in the system can also be seen in the investments flowing into liquid funds. The table below shows the AUM of liquid funds since the pandemic started.

The above table clearly reveals that there has been a huge inflow of funds in this category since the month of March. But in the last two months, there has been a drop in the AUM as many investors may now be considering different options, due to a drop in the returns.

So, should you hold on to your Liquid Funds?

As the dynamics of investments change, investors need to be pro-active with respect to where they park their funds. It is important to have a contingency fund which covers at least 3-6 months of expenses and these emergency funds need to be parked as per the investor’s requirement.

Investors who have invested in liquid funds should regularly review the status of their contingency funds. They should ensure that any extra amounts are shifted other debt funds, in case there is no immediate requirement.

To help decide what kind of funds they should shift to, investors should be clear about their investment time horizon. Below are some categories of funds which the investor can consider as per the duration of the investment.

The table below gives the Average YTM of the above-mentioned debt categories as well as the maximum and minimum modified duration of that category. We have considered only those funds whose AUM are Rs.1000 crores and above.

The above table clearly shows how one can earn extra returns just by going a category notch above liquid funds. We have observed that there are many investors who have cash lying in liquid funds for over 3 months at a time. Ideally, they should manage their investments more efficiently, by deciding for how long they should stay invested in a particular type of fund.

There’s an age old saying, ‘A little effort goes a long way…’ and that’s completely true with respect to managing money. Taking the effort to review and revise your portfolio, wherever necessary, could literally convert time into money!

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Disclaimer

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.