Investors play safe, shift to large liquid schemes after IL&FS crisis

The crisis sparked by Infrastructure Leasing & Financial Services’ (IL&FS) debt default last year has spurred investors to flock to safety and repose their faith in established names. As a consequence, assets of large liquid funds have surged over the past year.

HDFC MF’s Liquid Fund has grown 110 per cent to Rs 86,445 crore over the last one year. Assets under management (AUM) of the scheme stand at nearly four times the size of its largest equity scheme.

This particular scheme now accounts for 3.3 per cent of the industry’s overall assets of Rs 24.53 trillion. Liquid funds invest in debt and money market instruments, such as government securities, treasury bills, and call money, among others.

Liquid schemes of other leading fund houses such as ICICI Prudential MF, Aditya Birla Sun Life MF, and SBI MF have also seen their AUM soar above the Rs 50,000 crore-mark. Together, the top five liquid schemes form 12 per cent of the industry’s corpus.

Overall liquid assets have risen despite 23 of the 43 fund houses' schemes seeing a dip in AUM over the past year. This shows investor preference towards larger fund houses, especially those perceived to be ‘safe’.

“There has been a flight to safety since the IL&FS episode; investors are trying to find comfort with established names,” said a debt fund manager on condition of anonymity.

Conversely, inflows into long-tenure and credit risk funds have stalled owing to concerns over credit and the interest rate outlook. According to experts, government spending since early June, as well as the Reserve Bank of India’s intervention through measures such as open market operations, has helped improve systemic liquidity. Some of this money has flowed to MFs.

But what happens when the cycle turns?

“Too much concentration is not good and it remains to be seen how things will pan out when there are large-scale redemptions,” added the fund manager cited above.

 
Some experts rule out the possibility of systemic risks, especially in the light of new restrictions expected to be put in by the Securities and Exchange Board of India (Sebi) for liquid schemes.

“The underlying instruments that these funds invest in are liquid enough, and the new norms such as exit loads should help curb the flow of hot money into these funds, thus reducing the amount of sudden inflows and outflows,” said Kaustubh Belapurkar, director (fund research), Morningstar Investment Adviser India.

Sebi’s new norms may mandate liquid funds to hold at least 20 per cent of their money in cash and cash equivalents, such as G-secs and T-bills. Sector exposure will be reduced to 20 per cent of assets, compared to 25 per cent at present.

An exit load may also be introduced to discourage sudden redemptions.

Although liquid funds are among the safest within debt categories given the short duration, they come with an element of credit risk. For instance, on September 10, 2018, the net asset values (NAVs) of a few liquid funds fell 1 per cent after the debt papers issued by IL&FS were downgraded. However, instances in which liquid funds see such a large drop in NAVs are rare.