Retail AUM and folios in liquid funds increasing steadily

Liquid funds are gaining popularity among retail investors.

AMFI data shows that retail liquid folios have gone up from 1.33 lakh in 2009 to 2.43 lakh as on June 2015, a growth of 83%. During the same period, the retail liquid AUM has gone up from Rs. 673 crore to Rs. 3,214 crore.

“Distributors have been using liquid funds to park clients’ short term money in liquid funds. I think the retail liquid AUM will go up further from here,” says Ramesh Bhat of Aniram.

“Retail investors are realizing the benefits of liquid funds. We are also focused on promoting liquid funds among retail investors. I think the liquid assets will only grow from here,” says D P Singh, ‎Executive Director & Chief Marketing Officer (Domestic Business), SBI Mutual Fund.

Fund officials say that distributors are increasingly using liquid funds as to onboard first time MF investors. “It is a good idea to onboard clients through liquid funds, which are the least risky products. Investors can experience mutual funds through liquid funds and can slowly graduate to hybrid and equity funds,” says G Pradeepkumar, CEO, Union KBC Mutual Fund.

Though there has been a steady rise in the folios and AUM, liquid funds still remain predominantly a favourite investment among corporates and banks. As on August 2015, retail AUM only accounts for 2% or Rs. 3,214 crore of the total Rs. 2.06 lakh crore liquid AUM of the industry.  “I think the retail AUM will grow but not at the same pace as institutional AUM because liquid funds have very thin margins and are a high volume product,” adds Pradeepkumar. 

While retail interest has increased in liquid funds, distributors say that the tax changes have made liquid funds less attractive now.

To qualify for long term capital gains, investors have to hold debt funds for more than three years. To overcome this challenge, many fund houses have launched arbitrage funds as an alternative to liquid funds.

“Liquid funds don’t remain an attractive proposition for retail investors now. I think investors are moving to arbitrage funds which are more tax efficient and are offering anywhere between 8% to 9% returns,” points out Arvind S Paranjape, a Pune based advisor.

Besides, fund houses say that they are required to have a single plan for different categories of investors, which has made it challenging for them to push liquid funds among retail investors.

Earlier, fund houses had multiple plans (retail, institutional, super-institutional, etc.) for different categories of investors. In September 2012, SEBI asked fund houses to have a single plan for all types of investors. Thus, fund houses now have to ensure that they are competitive by charging a low TER. As a result, fund houses can’t pay more commissions to push liquid funds among retail investors, who largely invest through distributors.

Growth of retail liquid fund folios and AUM