Liquid fund inflows at a 7-year high as investors avoid risk

Synopsis

Liquid funds saw a record inflow of over ₹46,000 crore in April, the highest in seven years. This surge was driven by ample money in the banking system and attractive short-term returns. Investors also chose these low-risk options due to equity market volatility. Liquid funds offer quick access to money, making them ideal for parking surplus funds.

ET Intelligence Group: Net liquid funds inflow reported a record year-on-year increase of ₹46,448 crore in April, the highest in at least seven years, according to data from the Association of Mutual Funds in India (AMFI). It was nearly three times the rise of ₹15,905 crore seen a year earlier, aided by abundant system liquidity, attractive short-term yields, seasonality and cautious approach by investors amid a volatile equity market. Led by a strong incremental flow, the net inflow into liquid funds also rose to a seven-year high of ₹1.65 lakh crore in April from ₹1.19 lakh crore a year earlier.

April typically shows a reversal of a higher outflow from liquid funds in the previous month when banks, financial institutions and corporates withdraw funds to manage quarter-end and financial year-end balance sheets. This year's rebound in April was significantly stronger, though, amplified by excess liquidity conditions. The liquidity surplus in the banking system ranged between ₹2 lakh crore and ₹5.5 lakh crore during April compared with ₹1 lakh crore-₹2 lakh crore in the year-ago period, according to the RBI data.

"System liquidity remained ample in April, supported by RBI measures, prompting banks and corporates to channel a portion of their surplus funds into liquid schemes," said Abhishek Bisen, head of fixed income at Kotak Mutual Fund.

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Flight to Safety: Geopolitical risks, market volatility drove investors to park surplus cash in CDs, treasuries and CPs amid uncertainty

Bisen added that short-term rates remained elevated during the January-April period, with CD (Certificates of Deposit) rates hovering at 6.5-7.5%. This lifted liquid fund yields making them a more attractive option for parking funds.

V Ramachandra Reddy, head of treasury at Karur Vysya Bank, pointed out that liquid funds offered returns of around 5.5-6% in April compared with overnight rates of around 5%, creating a yield advantage of 50-100 basis points. "This provided banks an opportunity to earn incremental returns on surplus liquidity," Reddy said.

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Operational flexibility also played a role. According to Reddy, liquid schemes offer T+1 liquidity, allowing funds to be accessed within one business day, and are largely neutral under liquidity coverage ratio (LCR) norms as they qualify as liquidity available within 30 days. This makes them an efficient parking avenue for institutional treasuries.

Additionally, heightened geopolitical tensions and equity market volatility have prompted investors to adopt a more cautious stance by parking surplus funds in low-risk liquid instruments. This tactic allows investors to retain flexibility to redeploy capital once market visibility improves.

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