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Akhil Chaturvedi, Chief Business Officer at Motilal Oswal AMC, noted that while August flows were better than June and July, the unexpected drop was concerning.
He explained that June had seen negative flows due to advance tax payments, but August’s decline was not as straightforward.
Chaturvedi linked this dip to a possible liquidity crunch in the system, driven by increased working capital needs of companies.
The drop wasn’t limited to one category—it affected ultra-short, liquid, money market, and arbitrage funds.
Businesses opt for short-term investments
Mohit Gang, CEO of Moneyfront, highlighted that the cause of this decline was difficult to pinpoint.
Conversations with large treasury clients revealed that many businesses anticipated needing funds in September for tax payments.
This led them to opt for shorter-term investments in August, as opposed to the usual longer-term parking in liquid funds.
Typically, liquid fund investments have durations exceeding a month, but businesses’ demand for liquidity in September prompted a shift to shorter investment horizons.
Rise in overnight yields and arbitrage funds
Another factor impacting inflows was the recent sharp rise in overnight yields, which may have drawn funds away from liquid funds.
Gang noted that while there were still some positive inflows, they were significantly lower than in previous months.
Arbitrage funds also saw a drop in inflows.
Chaturvedi attributed this to two factors: liquidity tightness and a recent 2.5% hike in capital gains tax.
Though the tax increase may have had a minor impact, the liquidity crunch seemed to be the larger issue.
Gang agreed that rising taxes on futures and options (F&O) trades and spread compression affected arbitrage fund returns, making them less appealing to investors.
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