Liquid funds as a category has done better than short term bond funds in the month ended March 7. Liquid funds delivered 0.62% returns as against 0.51% returns delivered by short term bond funds
The superior returns delivered by liquid funds are attributed to the spike in yields on short term papers - especially the three year certificate of deposits (CD) issued by banks. Liquid fund portfolios have a significant allocation to these CDs.
Yields on three month CD have increased from 8.61% on February 1 to 9.53% on March 1. This spike in yields is captured well by liquid funds that run portfolios with very low maturity profile, say around 45 days to 60 days.
Fund managers of these funds could deploy maturity proceeds of old investments at such higher yields which resulted into superior performance of these funds. Towards the end of the financial year banks try to shore up their balance sheet and hence borrow more.
The advance tax payments deadline of March 15 also ensures that corporate entities and high net worth individuals pay taxes to government resulting into liquidity crunch. This increased demand for money in a tight liquidity scenario results into higher yields.