Money market funds received the highest inflows – Rs 44, 574 crore – among debt funds in July, according to data from the Association of Mutual Funds in India (Amfi) data. This was primarily because the returns from these schemes have been much higher, compared to competing products like liquid funds.
Currently, yield-to-maturity of liquid funds are at 5.70% whereas money market funds are at close to 6.30%. The volatility is also likely to be lower on account of surplus liquidity in the system. And this is encouraging more corporates and high networth individuals to invest in these schemes, said a debt fund manager.
Shifting Liquidity Management Strategies
These inflows of Rs 44,574 crore in July were a multi-year high. On the other hand, liquid fund and overnight fund collected inflows worth Rs 39,355 crore and Rs 8,866 crore in July, respectively. In June, money market funds saw net inflows of Rs 9,484 crore compared to net outflows of Rs 25,196 crore in liquid funds. The fund managers said that investors shift their liquidity management strategy to money market funds.
In all, the money market fund held assets worth Rs 3.37 lakh crore as of July 31.
Money market fund invests in debt and money market securities with maturity up to one year, whereas a liquid fund invests in securities with maturity up to 91 days.
The Outlook: Sustained Inflows and Market Expectations
“The liquid funds currently have portfolio yield below 6%. The money market category had higher portfolio yields. Therefore, I believe there is a slight shift to the money market category from the liquid category. Investors are preferring the money market category for their liquidity management relative to the liquid category,” said Puneel Pal, head of fixed income, PGIM Mutual Fund.
Marzban Irani, CIO-Fixed Income at LIC Mutual Fund, also agreed that there has been an increased preference for the money market fund over liquid fund category. “Money has been flowing into the money market fund category. Last December liquidity was tight. After the RBI took a lot of measures and infused liquidity, average returns of the liquid fund category declined drastically,” Marzban added.
Debt funds had shown a comeback, collecting highest net inflows in the current financial year. It received net inflows worth Rs 1.07 lakh crore in July, with its AUM at Rs 18.76 lakh crore.
Fund managers expect the inflows to sustain in the money market fund going ahead as well. “We are probably at fag-end of rate cut cycle. Huge rate cuts are not expected. So more investors likely move to money market funds where duration is capped at one year,” said Irani.