How Does Exit Load Impact Liquid Mutual Funds?

Liquid mutual funds are one of the most popular ultra-short-term investment options. These funds invest your money in securities such as treasury bills, certificate of deposits, commercial papers, etc., that have a maturity of 91 days. Moreover, these funds do not have any lock-in period.As a result, the funds were commonly used by large institutional investors and corporates for parking a significant amount of their surplus money for durations ranging between 1-7 days. When such large investors exited the fund, it forced the fund managers to sell the securities, often at a discounted price. This ultimately led to reduced returns or even losses for retail investors.To prevent such large short-term investments and encourage corporate investors to use other options like overnight funds, SEBI approved graded exit load in liquid funds in 2019. Check out the applicable exit load in liquid funds and how it impacts their performance-

Rather than a flat exit load, SEBI has introduced a graded exit load between 0.0045% and 0.0070% for redemptions within 7 days. The lowest rate of 0.0045% is applicable if you redeem your liquid fund investments within 5-6 days. The exit load continues to rise as the holding period falls and reaches 0.0070% for investments held for less than 1 day.In comparison, overnight funds do not have any exit load and can be exited within a single day. These funds have to mandatorily invest in debt instruments that have a maturity of one day. Overnight reverse repos and collateralized borrowing and lending obligations (OBLOs) are some common examples of securities preferred by overnight funds.

According to the recent returns delivered by top liquid funds, the exit load does have some impact on the returns they generate, especially if redeemed within 2-3 days. Due to the exit load on liquid funds, overnight funds can deliver better returns if the investment will only be held for up to 3 days.But after a holding period of 3 days, liquid funds still have an edge in terms of returns compared to overnight funds even after deducting the exit load. However, the introduction of exit load sure has made overnight funds a competitive choice for investors who only preferred liquid funds in the past.

Before investing, it is wise to know all the charges associated with the investment. If you are planning to invest in liquid funds for a very short duration between 1-7 days, do note the applicable exit load before investing. In such a scenario, an overnight fund might be a better choice for you.If you are unable to make the decision, you can always consult a reliable investment advisor.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.