When you invest, your sole intent is to see the growth of your principal amount without any loss of capital. Hence, you choose funds that could have lower risk with moderate returns, such as debt funds.

[Read: Is Your Investment In Debt Mutual Fund At Risk?]

But the debacle of ILFS, followed by similar defaults in repayment by other top corporates, has led to a gargantuan credit crisis in debt mutual funds and an erosion of investors’ principal. Simply because many fund houses had taken exposure to debt papers issued by these defaulters.

From these instances, investors learned valuable lessons:

  1. What is considered to be safe, is not necessarily safe (Debt investments)
  2. One has to prudently choose a worthy fund from a well-established fund house that follows robust investments process and systems

[Read: Can You Ignore Default And Liquidity Risk While Investing In Debt Mutual Funds?]

Since then, investors have become extremely cautious, investing only in mutual fund schemes that are from reputed and established industry players. Investors perceive these large fund houses to be safer and highly adept at managing their investments; hence they have invested heavily in debt funds offered from these fund houses, in order to preserve their capital. Specifically, in liquid and overnight funds, for these funds invest in debt instruments having a short maturity period.

A liquid fund invests in debt & money market instruments with a maturity of up to 91 days only. They invest in money market instruments such as Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, Treasury Bills, and government securities, among others.

[Read: A 3-Step Guide to Building A Liquid And Secure Emergency Fund]

And overnight funds, one of the lesser-known categories of debt mutual funds, offers high liquidity by investing in overnight securities having a maturity of 1 business day. They invest in short-term security instruments including Tri-Party Repos (TREPS), Reverse Repos, and debt instruments with overnight maturity.

However, though liquid fund entails low risk, they are not absolutely safe. The performance of the liquid funds depends on the quality of debt papers and money market instruments they hold in the portfolio.

Particularly, the proportion of Commercial Papers (an unsecured negotiable money market instrument issued by corporates, primary dealers and all India Financial Institutions as an alternative source of short-term borrowings).

Whereas for an overnight fund, there is a reinvestment risk, i.e. overnight funds may not be able to reinvest their proceeds at the same rate of return, and that doesn’t cause any capital erosion.

Among the two, investment risk involved for an overnight fund is least or almost zero and are more liquid.

[Read: Liquid Funds v/s Overnight Funds: Where To Park Your Short-Term Money?]

Hence, the investors decided to play safe and invest mostly in these two funds for a short term of say up to a year. The AMFI monthly data that was released validate this, which observed that there was a steady rise in number of folios, especially in Liquid funds and overnight funds.

Table1: Rise in number of folios of various categories of Debt funds

Open-ended Debt Schemes Apr-19 May-19 Jun-19 Jul-19
Overnight Fund 21,363 22,149 23,588 25,332
Liquid Fund 1,451,293 1,493,220 1,573,737 1,608,355
Ultra-Short Duration Fund 591,392 606,796 616,149 625,353
Low Duration Fund 922,455 924,739 920,401 911,841
Money Market Fund 284,325 288,865 294,011 300,940
Short Duration Fund 263,140 267,690 270,692 275,579
Medium Duration Fund 243,389 236,775 231,738 227,819
Medium to Long Duration Fund 103,875 103,695 104,257 105,536
Long Duration Fund 18,687 18,851 19,721 22,181
Dynamic Bond Fund 212,622 210,439 209,773 210,881
Corporate Bond Fund 193,906 200,609 209,731 225,630
Credit Risk Fund 576,015 564,179 554,021 541,549
Banking and PSU Fund 84,669 87,682 91,470 98,344
Gilt Fund 64,848 68,296 74,039 83,926
Gilt Fund with 10 yr constant duration 10,400 11,937 14,543 19,014
Floater Fund 133,693 133,980 134,141 135,243

Data as of July 31, 2019
(Source: www.amfiindia.com)

Due to this, the average asset under management (AAUM) of liquid funds and overnight funds witnessed a surge of 8% and 40% respectively from April 2019 to July 2019.

Graph 1: Quarterly AAUM of top 10 industry players (Rs in Lakhs)

Data as of June 30, 2019
(Source: www.amfiindia.com)

Except for Reliance Mutual Fund, UTI Mutual Fund, and ICICI Prudential Mutual Fund,remaining top industry players have witnessed a good steady growth on a quarterly basis and within a year it rose by double-digit.

Table 2: Year over year growth in AAUM of top ten industry players

Fund House April – June 2018- Q1 AAUM (Rs in Lakhs) April – June 2019- Q1 AAUM (Rs in Lakhs) yoy-growth (%)
HDFC Mutual Fund 30684072 36253843 18%
ICICI Prudential Mutual Fund 31016625 33728675 9%
SBI Mutual Fund 23311400 30753386 32%
Aditya Birla Sun Life Mutual Fund 24926992 25396526 2%
Reliance Mutual Fund 24044537 22257573 -7%
Kotak Mahindra Mutual Fund 12763523 16120906 26%
UTI Mutual Fund 15318313 15786586 3%
Franklin Templeton Mutual Fund 10441597 12496738 20%
Axis Mutual Fund 7920123 10222115 29%
IDFC Mutual Fund 6959051 8227912 18%

Data as of June 30, 2019
(Source: www.amfiindia.com)

This indicates that established players of the industry with robust investment systems in place have seen substantial growth in the form of an increase in investments due to the trust of investors, despite exposure to the credit crisis, debt markets facing liquidity crisis and slowdown in economy due to several macro and micro economic factors. What’s augmented inflows is the market regulatory body’s stringent actions to protect investors’ interest, which are as follows:

[Read: Should The Rating Agencies Be Blamed For This Credit Crisis?]

Due to this, investors were encouraged to invest in debt funds, as it would enable transparency when effective implementation is complete and may even help eliminate systemic risk.

Since then, several fund houses are seizing this opportunity by launching overnight funds and liquid funds extensively to gather more AAUM. These funds primarily invest in a judicious mix of debt and money market instruments having a short duration of less than a year.

[Read: Why Your Money In Liquid Funds Is At Risk?]

Yes Mutual Fund (a new player) and PGIM India Mutual Fund have launched an overnight fund-YES Overnight Fund and PGIM India Overnight Fund.

The overnight fund is a category of debt scheme emerged after the SEBI’s recategorization norms. As per the asset allocation also, both, YES Overnight Fund and PGIM India Overnight Fund can invest up to 100% of the portfolio into Debt Securities and Money Market Instruments with maturity on or before the next business day.

On the risk-return spectrum, overnight funds are placed lower because these carry the least amount of investment risk due to its investment into instruments of shortest investment duration of one day.

So, the overnight fund is a plausible choice as it provides better returns than bank FDs, are more liquid, and, at least, that doesn’t cause any capital erosion.

But at the same time, the overnight funds generate returns, almost in line with general levels of interest rates and debt/money market conditions prevailing from time to time, i.e. in line with the repo rates and inter-bank lending rates in the overnight market, under normal conditions.

[Read: Are Mutual Fund Houses Right In Launching Overnight Funds Now?]

So, it is important, that one should be extremely careful while choosing a fund for investment. Investing in new funds makes less sense because it does not have a track record; especially when there are many funds available that have performed well within the category.

At the same time, one should select a worthy fund based on the evaluation of qualitative and quantitative parameters, that include the portfolio characteristics and quality of the debt instruments  held by the scheme. These criteria accurately portray the fund’s performance across market cycles, risk involved and highlight the credibility of the fund house with processes and system in place.

Besides, don’t forget your own investment time horizon and appetite for risk. If you have a time horizon of less than a month and want to keep your money safe, it’s better to go with overnight funds. On the other hand, if you are willing to take a slightly higher credit risk for a better yield and can stay invested for at least three months, consider liquid fund.

[Read: The Best Liquid Funds For 2019]

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