Liquid Fund Growth Rates: Why Are They Trending Lower?
Liquid funds are high-liquidity income schemes that invest in debt and money market instruments such as government securities, treasury bills and call money, among others.
It has been observed that liquid fund growth rates in the past few months have been trending lower than the usual rate of 6%-7%, which was seen a year ago - making many investors jittery.
The RBI periodically cuts repo and reverse repo rates to support the economy.
The RBI Impact
Some of the instruments liquid funds invest in are T-Bills and government securities. The yields of these instruments have declined with the lowering repo rate.
Changing Risk Profile
In 2019, SEBI issued directives to augment the Risk Management Framework for liquid funds, mandating them to invest minimum 20% net assets in Liquid Assets (cash, T-bills, etc.)
As these are relatively low-risk, the yields are on the lower side.
Nothing Is Permanent
This stance by RBI is likely to be a short term move to stimulate growth in a stressed economy.
As interest rates go up, so will yield to maturity of instruments liquid funds invest in.
A Safe Bet
Liquid funds remain a safe choice among debt funds. It gives decent returns to your savings bank account, given those rates have also been trending lower.
Long-term interest rates have fallen less than short-term, so you might as well opt for liquid funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.