Investors take Rs 44,000 cr away from liquid funds; stamp duty rule change may force trend to continue

The outflow of funds, industry experts say can also be attributed to the need for capital that companies might have felt at the end of the quarter where revenues are expected to be hit by the coronavirus and the resultant lockdown.

Liquid fund investors were seen taking money away in the month of June as corporations geared up to deal with working capital requirements at the end of the first quarter of this fiscal year. After witnessing healthy inflows of Rs 62,000 crore and Rs 68,000 crore in the months of April and May, liquid funds saw outflows of Rs 44,000 crore in June. Experts say the move reflects the growing need for capital by corporations as the quarter ended and is also a result of the imposition of stamp duty on mutual fund purchases. With a 0.005% stamp duty to be levied on every mutual fund purchase, it could soon result in more and more money being taken away from liquid funds.

“The primary reason is the stamp duty that came in,” said Omkeshwar Singh, Head Rank-MF, Samco Group. “It was for weekend parking of funds, the impact on returns is close to 25-30%. So now, whatever you were getting, it would get less by that much,” he added. From July, a stamp duty of 0.005% would be charged on every purchase of a mutual fund. “The lower the holding period of investment, the higher will be the impact. This could impact large institutional investors who mostly put their money in liquid schemes for a shorter time,” Jitesh Agarwal, Founder – Treelife Consulting told Financial Express Online. 

The outflow of funds, industry experts say can also be attributed to the need for capital that companies might have felt at the end of the quarter where revenues are expected to be hit by the coronavirus and the resultant lockdown. “Outflow from Liquid funds at the end of every quarter is a very common trend if we look at the past data,” Sayalee Khandke, Manager Research, Investica – an online platform for investing in mutual funds told Financial Express Online. “Most liquid fund investors are corporate investors and banks. The redemptions every quarter are on account of Advance tax payments for corporates, to maintain capital adequacy norms for banks and such related expenses,” she added. 

Taking money from mutual funds, investors could have also pounced on the opportunity that equities provided. The blue-chip stocks were available in the market at a cheaper rate and funding news and plans announced by Reliance Industries contributed much to attract investors to invest directly in equity instead of putting money in mutual funds or lock in the money into midcap and smallcap companies,” Jitesh Agarwal added.

Although flows into liquid funds get normalised at the beginning of a new quarter, this time it could be different with companies exploring other avenues to park their money. “With the introduction of Stamp Duty, Institutional investors may look for different avenues for parking the treasury money. Overnight funds and liquid funds will be the most impacted categories with stamp duty charges,” said Sayalee Khandke. She expects to see a consistent drop in liquid Fund AUM especially from investors who park the money for less than 1 month.