When liquid(water/butter) is added to starch lumps of starch are formed. Which are completely dry from inside. Adding more solvent doesn't seem to help therefore it is not a case of saturated solution. So what does cause the lump formation ? and how can it be prevented ?
The trick here is that you're not actually dissolving the starch. Starch is made up of small semi-crystalline granules of amylose and amylopectin which are actually pretty much insoluble at room temperature. Some water can get in as amylose breaks up the crystallinity, but it doesn't really dissolve. When you drop it into water, it hydrates a bit on the outside, holding it all together, but water doesn't make it into the inside. If you stir or shake it, you can break the clumps up into smaller pieces, eventually getting at most individual hydrated granules.
It's not until you heat the mixture that the granules really break apart and allow water in, in a process called gelatinization. This is what makes starch useful in cooking as the starch can form a more diffuse network, thickening the liquid.