Low rate on saving a/cs may make MFs attractive

Rating agency feels more money will flow into liquid funds, which give better interest rate

A steep reduction in savings account deposit rates announced by several public and private sector banks could increase the pace of incremental flows into liquid mutual fund schemes in the coming days.

With the reduction in savings account deposit rates, rating agency ICRA believes that liquid funds, which offer the advantage of liquidity and flexible maturity with easy redemption and higher returns over savings rate, are expected to gain prominence as a direct alternative to savings deposit and lead to greater investor participation in this asset class.

“Liquid schemes have reported annualised returns in the range of 6.5 per cent to 7 per cent over the last one year; the returns have however moderated to 6.25 per cent to 6.50 per cent over the last five months on the back of declining repo rates. These schemes have provided 2.75 per cent to 3 per cent higher pre-tax returns, on an annualised basis, than savings accounts. However, accounting for income tax benefits associated with interest in savings deposits, the difference between annualised returns of liquid funds and savings accounts moderates to 0.87 per cent to 1.63 per cent for an individual at the highest tax bracket,” said Karthik Srinivasan, senior vice-president and group head, financial sector ratings, ICRA Limited.

The growth in the individual investor base for mutual funds had so far driven the growth in equity assets under management (AUM) while the individual investors’ interest in the liquid schemes was limited. Though liquid mutual funds, like other mutual funds, are subject to market risk, the rating agency noted that the shorter maturity profile of the underlying investments of around 1-2 months and the high credit quality of the underlying portfolio, which comprises money market instruments like certificate of deposits, treasury bills, and high rated commercial papers alleviate credit risk to some extent.

As on date, there are 49 active liquid mutual schemes with assets under management (AUM) of around `3.23 lakh crore as at the end of July 2017.

Liquid mutual funds have traditionally been preferred instruments for corporate clients for liquidity management. Corporate and other institutional clients together accounted for 91 per cent of the liquid fund’s monthly average AUM in June 2017 while the remaining 9 per cent was accounted by individual client segment, particularly the HNI segment which accounted for 7 per cent of the monthly average AUM, the rating agency said.

“Individual investors investments in liquid mutual funds registered a growth of 34 per cent in FY2015 to FY2017, outperforming the savings deposits growth rate of 20 per cent during the same period,” it said.