Why Are Investors Pouring Money Into Liquid Funds?

Stable interest rates are making liquid funds attractive for investors who want relatively safer and more predictable returns. Since interest rates are not changing much, these funds are able to offer more predictable income with lower volatility compared to long-duration debt funds.

The Reserve Bank of India (RBI) is largely expected to maintain a cautious policy stance at its next Monetary Policy Committee (MPC) meeting scheduled for June 3-5, 2026. The central bank has kept the repo rate unchanged at 5.25 per cent since December 2025, after an aggressive 125 basis point rate cut cycle during 2025.

According to the Association of Mutual Funds in India (Amfi), the assets under management (AUM) of debt-oriented schemes rose 15.9 per cent month-on-month to Rs 19.14 lakh crore in April from Rs 16.52 lakh crore in March. The total folio count in debt-oriented schemes also increased 2.7 per cent to 85.08 lakh.

Liquid funds saw the strongest investor interest in April, attracting record inflows of Rs 1.65 lakh crore during the month. This helped their AUM rise to an all-time high of Rs 6.36 lakh crore. Liquid funds now account for nearly one-third of the total AUM of all debt mutual fund schemes.

Other short-term debt fund categories also witnessed healthy inflows. Overnight funds received Rs 31,420 crore, while money market funds attracted Rs 20,643 crore. Ultra-short duration funds saw inflows of Rs 15,652 crore, followed by low duration funds at Rs 7,093 crore and short-duration funds at Rs 3,917 crore.

In contrast, long-duration debt funds continued to remain under pressure. These schemes recorded outflows of Rs 727 crore in April after seeing outflows of Rs 1,047 crore in March. This indicates that investors are still cautious about taking higher duration risk due to uncertainty over the future direction of interest rates.

Anup Agrawalla, head of wealth at AU Small Finance Bank, said a stable policy environment helps investors earn predictable income without taking excessive risks. “When the RBI keeps interest rates stable, investment returns do not fluctuate sharply. Short-duration investments become attractive because they provide reliable income while keeping interest rate risk low. Since these investments mature quickly, investors also get better liquidity and flexibility to reinvest if market conditions change,” he said.

Alekh Yadav, head of investment products at Sanctum Wealth, said short-duration carry strategies work well when interest rates are expected to remain broadly stable.

“In a stable rate environment, short-duration strategies help reduce interest rate risk and volatility while allowing investors to earn relatively stable accrual-driven returns,” he said.

Debt market experts believe the current market is favouring investors who prefer stable and safer returns over high-risk bets. Since many short-term debt funds are currently offering yields similar to some long-term debt products, investors are choosing them to avoid locking their money in for longer periods.

This strategy also gives investors more flexibility at a time when global uncertainties and inflation concerns continue to remain high. Amfi, in its monthly note for April, said, the record inflows into liquid funds reflected safety and liquidity as investors navigated an uncertain and rapidly changing environment.