Investors in liquid funds have a tendency to churn their portfolios and switch between funds every seven days, in search of higher returns. “This behaviour does not make sense anymore, because investors will now have to factor in the stamp duty impact. It is in their interest to stay invested for a longer period and plan their flows accordingly,” said the official.
For instance, an investor who has pooled in Rs 100,000 in liquid funds will have to bear Rs 5 as stamp duty upfront, and will get units worth Rs 99,995 allotted to him. If the fund provides annualised gross returns of 5 per cent — for a 7-day holding period — the return will whittle down to 4.74 per cent, implying a hit of 0.26 per cent. For higher holding periods, however, the impact will reduce.
Lower returns may prompt investors to park money in bank fixed deposits, in which returns have dipped as well. SBI, for instance, is now giving 2.9 per cent for deposits of 7-45 days for investments below Rs 1 crore. Axis Bank gives 3.25 per cent for the same period.
Net assets under management for overnight and liquid funds stood at Rs 67,299 crore and Rs 4.69 trillion, respectively, as on May 31.
The former saw outflows of Rs 15,880 crore, while the latter saw inflows of Rs 61,870 crore in May. Corporates prefer parking surplus cash in these two categories.
Overnight and liquid funds have given 1-year returns of 4.45 per cent and 5.26 per cent, respectively, shows data from Value Research.