If there is one thing that most Indian investors seek while investing, it is a balanced combination of risk and returns. Liquid funds fulfill their desires by providing an investment avenue that is low in risk and gives assured returns. These are debt funds that invest in several money market instruments, such as commercial paper, government securities and treasury bills. They are quite popular amongst risk-averse investors because of their low risk – low return profile. If you have surplus cash in a savings account, you can earn higher returns by investing it in liquid funds.
Liquid funds, as the name suggests, allow you to withdraw your money whenever you want. However, if you plan to invest in liquid funds as short-term deposits because of penalty-free exits, read the recent changes made in their liquidity status.
What is an Exit Load?
It is the amount that you need to pay on selling your mutual fund units before a specific time frame. It exists to deter you from withdrawing the money you invested prematurely.
More About Exit Load on Liquid Funds
The low-risk profile and no exit load on liquid funds make them a lucrative short-term investment option for many investors. The returns you get by investing money in these funds are mostly around the interest rate on fixed deposits (FDs).However, unlike liquid funds, you need to pay the penalty on premature withdrawal of an FD.
In October 2019, the Securities and Exchange Board of India (SEBI) placed restrictions on the redemption of liquid funds. The board finalized a structure of graded exit load structure, which is:
| Redemption Within | Exit Load |
| 1 Day | 0.0070% |
| 2 Days | 0.0065% |
| 3 Days | 0.0060% |
| 4 Days | 0.0055% |
| 5 Days | 0.0050% |
| 6 Days | 0.0045% |
| 7 Days | 0.00% |
SEBI has also said that the structure will undergo annual changes based on the interest rates offered. Without prior consultation, no asset management company can make changes in it.
You can better understand the effect of introducing exit load on liquid funds with this example –
You invested INR 1,00,000 in liquid funds and redeemed the amount four days later after witnessing no growth. As per the graded exit load structure, the penalty equals five rupees, which is not high at all.However, it becomes very high for corporate investors who invest tens or hundreds of crores in liquid funds. The graded exit load structuring is done to keep a check on the inflow and outflow in liquid funds.
Consequences of Exit Load on Liquid Funds
- Corporate Transition to Overnight Funds
As an alternative to liquid funds, there are overnight funds that corporates are most likely to switch to. These funds a next safe bet as they provide liquidity with security. They are open-ended debt mutual funds schemes that invest in securities with a one-day maturity period.Market volatility does not have any impact on these schemes, which makes them an ideal option for corporate investors to earn some return with the least risk involved.
- Lower Risk for Retail Investors
Withcorporates transitioning to overnight funds, liquid funds become safer for small retail investors. It is because the continual flow of capital in and out of liquid funds will eventually cease, resulting in a minimum impact on the returns.
Liquid funds are one of the safest investment options in the market. They invest in instruments that have high credit ratings and offer a higher return as compared to a savings account. It is crucial for you to know about the impact of exit load on investment strategies if you want to become an experienced retail investor. You can also ask for help from renowned financial advisors like FinEdge to guide you throughout the investment process.
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