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Liquid funds and money market funds also felt the heat of the stock and bond market sell-off as they one-day and three-day returns turned negative. Here is why this happened.
We had earlier reported negative weekly returns in short, medium and long-term segments of debt mutual funds (dated 15th March) due to a sharp increase in bond yields. The same has now affected liquid and money market segments as well. Only overnight funds have so far been spared.
With an imminent economic crisis, the demand in the bond market has suddenly gone down as institutional investors sold off their positions. With a sudden drop in demand, the bond prices dropped. This resulted in a fall in NAV.
Market demand and supply is measured with the Bond yield = interest income/ current price. When prices fall, the yield shoots up. Longer the duration of the bond more will be the fall in price if demand falls, more will be the increase in yield, more will be the fall in NAV.
It does not matter if the bond is gilt or AAA-rated or A1+ rated. A sudden mismatch of sellers and buyers (sellers > buyers) will lead to a fall in the NAV. The image above shows how the five-year gilt yield shot up in the last few days resulting in trailing one-week (one-month) negative debt fund returns. It would also affect hybrid funds to varying extents.
The RBI has stepped in by buying Rs 10,000 crore of bonds to create demand (and therefore bond yields) in the market on 18th March. This has arrested the increase in yield a little.
The six-month gilt yield was 4.78% on 16th Mar. It shot up to 4.92% on 17th, 5.08% on the 18th, 5.15% on the 19th. The increased has slowed down but it is still an increase and therefore money market funds were not spared. Source: tradingeconomics: GINDGM
The three-month gilt yield was 4.73% on 16th Mar. It shot up to 4.80% on 17th, 4.88% on the 18th, 4.87% on the 19th. RBI’s action has made a better impact in this segment but was not enough to prevent a fall in liquid fund NAV. The situation should be better in the coming days. Source: tradingeconomics: GIND3M
With already low demand a decrease in interest rates could spell more trouble for debt mutual fund investors and RBI is likely to go slow in this regard. In any case, a drop in rates is unlikely to heighten the mood in the market immediately. It would only result in angering the common man.
What should investors’ do? The situation in the short-term segment of the bond market should stabilize soon. A few days of negative returns are possible now and then. So investors can continue to hold money market and liquid funds. Returns will be affected over the short-term though.
The last 1-day, 3-day and 1-week absolute change in NAV of liquid and money market funds along with relevant indices is shown below.
Short-term debt benchmark indices
| Benchmark | 1 Day | 3 Day | 1 Week |
| Crisil Liquid Fund Index | -0.06 | -0.06 | -0.01 |
| Crisil 1 Yr T-Bill Index | 0.02 | -0.15 | -0.10 |
| Nifty 1D Rate Index | 0.01 | 0.04 | 0.09 |
| Crisil 91 Day T-Bill Index | 0.02 | 0.06 | 0.12 |
The 1D index is for overnight funds.
Liquid funds
| Scheme Name | 1 Day | 3 Day | 1 Week |
| Aditya Birla SL Liquid Fund(G) | -0.08 | -0.07 | -0.03 |
| Axis Liquid Fund-Reg(G) | -0.06 | -0.05 | -0.01 |
| Baroda Liquid Fund(G) | -0.06 | -0.06 | -0.02 |
| BNP Paribas Liquid Fund(G) | -0.07 | -0.07 | -0.02 |
| BOI AXA Liquid Fund-Reg(G) | -0.08 | -0.08 | -0.04 |
| Canara Rob Liquid Fund-Reg(G) | 0.00 | 0.03 | 0.09 |
| DSP Liquid ETF | 0.00 | 0.02 | 0.05 |
| DSP Liquidity Fund-Reg(G) | -0.04 | -0.03 | 0.02 |
| Edelweiss Liquid Fund-Reg(G) | -0.06 | -0.06 | -0.01 |
| Essel Liquid Fund-Reg(G) | -0.06 | -0.06 | -0.02 |
| Franklin India Liquid Fund-Super Inst(G) | -0.06 | -0.05 | 0.00 |
| HDFC Liquid Fund(G) | -0.08 | -0.07 | -0.03 |
| HSBC Cash Fund(G) | -0.14 | -0.16 | -0.12 |
| ICICI Pru Liquid ETF | 0.01 | 0.02 | 0.06 |
| ICICI Pru Liquid Fund(G) | -0.07 | -0.07 | -0.02 |
| IDBI Liquid Fund(G) | -0.05 | -0.05 | 0.00 |
| IDFC Cash Fund-Reg(G) | -0.11 | -0.12 | -0.08 |
| IIFL Liquid Fund-Reg(G) | -0.02 | -0.02 | 0.03 |
| Indiabulls Liquid Fund(G) | 0.00 | 0.02 | 0.07 |
| Invesco India Liquid Fund(G) | -0.09 | -0.08 | -0.04 |
| ITI Liquid Fund-Reg(G) | 0.01 | 0.04 | 0.09 |
| JM Liquid Fund(G) | -0.01 | 0.00 | 0.06 |
| Kotak Liquid Fund-Reg(G) | -0.10 | -0.11 | -0.08 |
| L&T Liquid Fund(G) | -0.09 | -0.10 | -0.05 |
| LIC MF Liquid Fund(G) | -0.07 | -0.07 | -0.02 |
| Mahindra Liquid Fund-Reg(G) | -0.08 | -0.09 | -0.04 |
| Mirae Asset Cash Management-Reg(G) | -0.06 | -0.05 | 0.00 |
| Motilal Oswal Liquid Fund-Reg(G) | 0.01 | 0.03 | 0.08 |
| Nippon India ETF Liquid BeES | 0.01 | 0.02 | 0.05 |
| Nippon India Liquid Fund(G) | -0.09 | -0.09 | -0.04 |
| Parag Parikh Liquid Fund-Reg(G) | 0.01 | 0.04 | 0.09 |
| PGIM India Insta Cash Fund(G) | -0.08 | -0.08 | -0.04 |
| Principal Cash Management Fund(G) | -0.04 | -0.02 | 0.03 |
| Quant Liquid Plan(G) | -0.02 | 0.01 | 0.07 |
| Quantum Liquid Fund(G)-Direct Plan | -0.01 | 0.00 | 0.05 |
| Sahara Liquid-Fixed Pricing(G) | 0.00 | 0.00 | 0.04 |
| SBI Liquid Fund(G) | -0.05 | -0.04 | 0.00 |
| Sundaram Money Fund-Reg(G) | -0.05 | -0.04 | 0.01 |
| Tata Liquid Fund-Reg(G) | -0.10 | -0.11 | -0.06 |
| Taurus Investor Education Pool – Unclaimed Div(G) | 0.00 | 0.00 | 0.00 |
| Taurus Liquid Fund-Super Inst(G) | 0.01 | 0.03 | 0.08 |
| Union Liquid Fund(G) | -0.11 | -0.11 | -0.08 |
| UTI Liquid Cash Plan-Reg(G) | -0.08 | -0.09 | -0.05 |
| YES Liquid Fund-Reg(G) | 0.01 | 0.04 | 0.10 |
| Average | -0.05 | -0.04 | 0.00 |
| Median | -0.06 | -0.05 | 0.00 |
Money Market Funds
| Scheme Name | 1 Day | 3 Day | 1 Week |
| Aditya Birla SL Money Manager Fund(G) | -0.55 | -0.76 | -0.82 |
| Axis Money Market Fund-Reg(G) | -0.48 | -0.64 | -0.68 |
| Baroda Money Market Fund-Reg(G) | 0.00 | -0.07 | 0.00 |
| DSP Savings Fund-Reg(G) | -0.69 | -0.94 | -1.06 |
| Franklin India Savings Fund(G) | -0.50 | -0.66 | -0.68 |
| HDFC Money Market Fund(G) | -0.54 | -0.75 | -0.84 |
| ICICI Pru Money Market Fund(G) | -0.44 | -0.64 | -0.68 |
| IDFC Money Manager Fund-Reg(G) | -0.55 | -0.73 | -0.79 |
| Indiabulls Savings Fund-Reg(G) | -0.18 | -0.23 | -0.19 |
| Invesco India Money Market Fund(G) | -0.43 | -0.54 | -0.55 |
| JM Money Market Fund(G) | 0.01 | 0.04 | 0.09 |
| Kotak Money Market Fund(G) | -0.36 | -0.46 | -0.46 |
| L&T Money Market Fund-Reg(G) | -0.46 | -0.63 | -0.69 |
| Nippon India Money Market Fund(G) | -0.36 | -0.46 | -0.48 |
| PGIM India Money Market Fund-Reg(G) | -0.37 | -0.45 | -0.44 |
| Quant Money Market Fund(G) | -0.01 | 0.02 | 0.09 |
| SBI Savings Fund-Reg(G) | -0.43 | -0.54 | -0.56 |
| Sundaram Money Market Fund-Reg(G) | -0.31 | -0.39 | -0.40 |
| Tata Money Market Fund-Reg(G) | -0.50 | -0.66 | -0.70 |
| UTI Money Market Fund-Reg(G) | -0.31 | -0.41 | -0.43 |
| Average | -0.37 | -0.50 | -0.51 |
| Median | -0.43 | -0.54 | -0.56 |
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“The RBI has stepped in by buying Rs 10,000 crore of bonds to lower demand ”
Didn’t understand how RBI buying will lower demand. Can you explain a bit? Thanks.
My bad. I meant the opposite! Thank you. Corrected.
Thank you for the article Professor. Knowing why something is happening is always relieving.
Thank you for this very timely article Sir. One thing still puzzles me though – some funds seems to have been unaffected. Like the Quant Liquid plan or Canara Robeco Liquid plan etc. Is it because the debt instruments they have in their portfolio did not see their prices fall, like most bonds in the market? Looking at Quant’s portfolio, that looks quite unlikely (they CP or CD only). Or is it because they have cushioned the fall in bond prices with large cash positions? Any thoughts?
Hi Sir,
I would like to know, why they are selling, bonds are safe compare to all right ?
Thanks&Regards,
karen
Could be FII redemptions or domestic investors moving to Cash for some reason? Any case article explained the overall picture very well .