ET OnlineMutual fund investors have realigned their short-term investments, pulling money out of liquid and overnight funds amid changing preferences. These two categories together witnessed an outflow of more than Rs 81,000 crore in May and June.
According to monthly data released by the Association of Mutual Funds in India (AMFI), liquid funds saw an outflow of Rs 16,274 crore, while overnight funds recorded an outflow of Rs 65,401 crore over the last two months.
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On the contrary, money market funds have been receiving significant inflows. According to the data, money market funds recorded the second-highest inflows over the last three months—April, May, and June—among the 16 sub-categories within debt mutual funds.
Market experts believe this reversal is primarily driven by seasonal factors, as many corporates and institutions use these categories to park short-term surplus funds. However, by June, this money tends to flow out due to advance tax payments and quarter-end balance sheet adjustments.
“Additionally, with a series of interest rate cuts, yields in short-duration categories like overnight and liquid funds have flattened. As a result, investors have begun reallocating capital toward slightly higher-duration categories such as money market and ultra-short duration funds, which offer better accrual potential in the current interest rate environment,” Arjun Guha Thakurta, Executive Director, Anand Rathi Wealth Limited, told ETMutualFunds.
“In the past two months, we've also seen a reversal in equity markets, which may have further triggered outflows from retail investors as part of portfolio reallocation,” he added.
In April, money market funds received inflows of Rs 31,507 crore, followed by Rs 11,223 crore in May, and Rs 9,484 crore in June.
Investors generally consider overnight and liquid funds as options for parking idle savings outside the banking system. For a savings account alternative, safety and liquidity must take priority—and liquid and overnight funds come closest to meeting these criteria.
Given this context, the key question is: should one review their emergency fund parked in liquid or overnight funds? Addressing this, Thakurta advises that investors need not worry about recent outflows, as they are largely driven by institutional activity and seasonal factors—not by any structural concerns. Liquid and overnight funds invest in highly liquid instruments such as treasury bills, call money, and other short-term government-backed securities, which carry zero credit risk and offer fixed, predictable returns.
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Commenting on better alternatives to park short-term surplus money right now, the expert said it's about being selective. “If your investment horizon is up to 1–6 months, ultra short-term duration funds are ideal. For a horizon of 6 months to 1 year, arbitrage funds work well, as they offer better potential without a significant increase in volatility,” Thakurta recommends.
Looking at the monthly returns, liquid funds delivered an average absolute return of 0.53% in May and 0.49% in June. Overnight funds gave average returns of 0.46% in May and 0.41% in June.
In comparison, money market funds posted higher average returns—0.66% in May and 0.61% in June.
In the case of liquid and overnight funds, if an investor redeems money on a Friday, they receive the amount on Monday, but the net asset value (NAV) applicable will be that of Sunday. This is because NAVs for these funds are declared for every day, including weekends and holidays.
With continued outflows from these two categories, some investors are concerned about the potential impact on returns or liquidity. Addressing this, Thakurta said returns might remain slightly muted in the near term—especially for overnight and liquid funds—due to the series of interest rate cuts. However, there are no liquidity concerns.
“Liquid and overnight funds can comfortably handle large inflows and outflows as they invest in highly liquid instruments like treasury bills and call money. Even with recent outflows, these funds remain robust and well-positioned to meet redemptions without stress,” he added.
In May, corporate bond funds received the highest inflows among the 16 sub-categories, amounting to Rs 11,983 crore. In June, short-duration funds topped the chart with inflows of Rs 10,276 crore.
As these categories gain traction and receive the highest inflows, the question arises: are corporate bond and short-duration funds more suitable in the current environment compared to liquid and overnight funds?
Also Read | Mutual funds slashes cash allocation by Rs 13,000 crore in June; PPFAS and Quant MF join trend
The expert said it depends on the investment horizon. If you're looking to park funds for up to 6 months, ultra-short-term duration funds are ideal. However, if your time frame is beyond 6 months, arbitrage funds can be a wise choice, as they offer tax advantages along with better return potential and low volatility.
According to SEBI’s mandate, overnight funds invest in overnight securities with a maturity of one day, while liquid funds invest in debt and money market securities with a maturity of up to 91 days. In contrast, money market funds invest in money market instruments with a maturity of up to one year.
One should always invest based on their risk appetite, investment horizon, and financial goals.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in along with your age, risk profile, and Twitter handle.
According to monthly data released by the Association of Mutual Funds in India (AMFI), liquid funds saw an outflow of Rs 16,274 crore, while overnight funds recorded an outflow of Rs 65,401 crore over the last two months.
Also Read | Investors pump over Rs 30,000 crore in flexi-cap mutual funds in H1 CY2025. Is all-cap exposure a new favourite?
On the contrary, money market funds have been receiving significant inflows. According to the data, money market funds recorded the second-highest inflows over the last three months—April, May, and June—among the 16 sub-categories within debt mutual funds.
Market experts believe this reversal is primarily driven by seasonal factors, as many corporates and institutions use these categories to park short-term surplus funds. However, by June, this money tends to flow out due to advance tax payments and quarter-end balance sheet adjustments.
“Additionally, with a series of interest rate cuts, yields in short-duration categories like overnight and liquid funds have flattened. As a result, investors have begun reallocating capital toward slightly higher-duration categories such as money market and ultra-short duration funds, which offer better accrual potential in the current interest rate environment,” Arjun Guha Thakurta, Executive Director, Anand Rathi Wealth Limited, told ETMutualFunds.
“In the past two months, we've also seen a reversal in equity markets, which may have further triggered outflows from retail investors as part of portfolio reallocation,” he added.
In April, money market funds received inflows of Rs 31,507 crore, followed by Rs 11,223 crore in May, and Rs 9,484 crore in June.
Investors generally consider overnight and liquid funds as options for parking idle savings outside the banking system. For a savings account alternative, safety and liquidity must take priority—and liquid and overnight funds come closest to meeting these criteria.
Given this context, the key question is: should one review their emergency fund parked in liquid or overnight funds? Addressing this, Thakurta advises that investors need not worry about recent outflows, as they are largely driven by institutional activity and seasonal factors—not by any structural concerns. Liquid and overnight funds invest in highly liquid instruments such as treasury bills, call money, and other short-term government-backed securities, which carry zero credit risk and offer fixed, predictable returns.
Also Read | Nearly 112 lakh SIPs closed in 2025: Should you worry about the negative net SIP trend?
Commenting on better alternatives to park short-term surplus money right now, the expert said it's about being selective. “If your investment horizon is up to 1–6 months, ultra short-term duration funds are ideal. For a horizon of 6 months to 1 year, arbitrage funds work well, as they offer better potential without a significant increase in volatility,” Thakurta recommends.
Looking at the monthly returns, liquid funds delivered an average absolute return of 0.53% in May and 0.49% in June. Overnight funds gave average returns of 0.46% in May and 0.41% in June.
In comparison, money market funds posted higher average returns—0.66% in May and 0.61% in June.
In the case of liquid and overnight funds, if an investor redeems money on a Friday, they receive the amount on Monday, but the net asset value (NAV) applicable will be that of Sunday. This is because NAVs for these funds are declared for every day, including weekends and holidays.
With continued outflows from these two categories, some investors are concerned about the potential impact on returns or liquidity. Addressing this, Thakurta said returns might remain slightly muted in the near term—especially for overnight and liquid funds—due to the series of interest rate cuts. However, there are no liquidity concerns.
“Liquid and overnight funds can comfortably handle large inflows and outflows as they invest in highly liquid instruments like treasury bills and call money. Even with recent outflows, these funds remain robust and well-positioned to meet redemptions without stress,” he added.
In May, corporate bond funds received the highest inflows among the 16 sub-categories, amounting to Rs 11,983 crore. In June, short-duration funds topped the chart with inflows of Rs 10,276 crore.
As these categories gain traction and receive the highest inflows, the question arises: are corporate bond and short-duration funds more suitable in the current environment compared to liquid and overnight funds?
Also Read | Mutual funds slashes cash allocation by Rs 13,000 crore in June; PPFAS and Quant MF join trend
The expert said it depends on the investment horizon. If you're looking to park funds for up to 6 months, ultra-short-term duration funds are ideal. However, if your time frame is beyond 6 months, arbitrage funds can be a wise choice, as they offer tax advantages along with better return potential and low volatility.
According to SEBI’s mandate, overnight funds invest in overnight securities with a maturity of one day, while liquid funds invest in debt and money market securities with a maturity of up to 91 days. In contrast, money market funds invest in money market instruments with a maturity of up to one year.
One should always invest based on their risk appetite, investment horizon, and financial goals.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in along with your age, risk profile, and Twitter handle.
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