Widely read:
The equity markets have always donned several hats - the wealth creator, the panic filter and the fall-bearer. Following the turmoil fuelled by the Coronavirus outbreak and oil crash, the equity markets have been revealing its true nature. Even though many mutual fund investors are well aware of the equity gymnastics, some are on tenterhooks, seeing this pendulum-type behaviour. However, when it comes to debt funds, investors hardly witness liquid funds delivering negative returns.
What happened?
With the markets getting into a risk aversion mode, institutional investors are moving money out of the debt markets. Consequently, bond yields have increased, affecting even the very short-term segment of the debt markets. As a result, liquid funds have also witnessed a pinch of red, with their one-day returns turning negative later last week. Of the category of about 39-odd funds, over three-fourth of funds recorded negative one-day returns on Wednesday and Thursday last week. Even for some funds, this fall turned their entire one-week returns negative (look at the following table)
Funds that delivered negative one-week returns (%)
| Scheme | Returns |
| HSBC Cash | -0.12 |
| Union Liquid | -0.07 |
| Kotak Liquid | -0.07 |
| IDFC Cash | -0.07 |
| Mahindra Liquid | -0.06 |
| Tata Liquid | -0.05 |
| L&T Liquid | -0.05 |
| UTI Liquid Cash | -0.05 |
| Nippon India Liquid | -0.04 |
| Invesco India Liquid | -0.04 |
| BNP Paribas Liquid | -0.04 |
| PGIM India Insta Cash | -0.03 |
| HDFC Liquid | -0.03 |
| Edelweiss Liquid | -0.03 |
| BOI AXA Liquid | -0.03 |
| ICICI Prudential Liquid | -0.02 |
| Aditya Birla Sun Life Liquid | -0.02 |
| LIC MF Liquid | -0.02 |
| Mirae Asset Cash Management | -0.02 |
| Baroda Liquid | -0.01 |
| IDBI Liquid | -0.01 |
| Essel Liquid | -0.00 |
| *Returns as on 20th March 2020 | |
How worried should you be?
While a drop in the NAV of liquid funds isn't common, it is not unheard of. Since these funds are ultimately market-linked, liquid funds do tend to react to drastic incidents. History also suggests that liquid funds have previously given negative returns. An analysis of the daily one-year rolling returns of the category for the last 20 years has revealed that since 2000, there have been a total of 21 such instances - the highest instances in 2018 during the IL&FS episode and the second highest in 2002. The following graph highlights the magnitude of these instances.
Worst 15 liquid fund falls
The following table lists down the worst one-day fall witnessed by category of liquid funds in the last 20 yrs
| Date | Average one-day returns of liquid funds (%) |
| 22-Feb-2017 | -0.19 |
| 16-Jul-2013 | -0.18 |
| 24-Sep-2018 | -0.14 |
| 24-Jul-2013 | -0.07 |
| 09-Oct-2002 | -0.07 |
| 19-Mar-2020 | -0.05 |
| 18-Sep-2018 | -0.05 |
| 03-Mar-2008 | -0.04 |
| 06-Aug-2009 | -0.03 |
| 25-May-2000 | -0.03 |
| 17-Sep-2018 | -0.03 |
| 10-Sep-2018 | -0.02 |
| 14-May-2002 | -0.02 |
| 24-May-2000 | -0.01 |
| 17-Sep-2001 | -0.01 |
Interestingly, none of such instances turned into calamities. Meanwhile, AMFI (Association of Mutual Funds) has reportedly written to the RBI (Reserve Bank of India) to provide a liquidity window to fund houses amid the current redemption pressure.
Earlier in 2013, the RBI, as a precautionary measure, also opened a special liquidity window to help fund houses honour their redemption requirements. Besides, the RBI is currently taking real active measures as a pre-emptive move to infuse liquidity into the system.
What should investors do?
While the situation is still unfolding, investors should certainly have their essential money in cash and bank. But beyond that, there is no need to retrieve from liquid funds hastily. Any extreme reaction would just exacerbate the panic.
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