Background

Effective from 19th October, SEBI has announced a graded exit load on mutual funds. Mutual fund houses have been asked to impose the same on investors, both institutional and retail, who redeem their liquid fund units within 7 days from purchase. So now, investors who redeem their fund units on the next day of buying units will have to pay more exit load compared to the ones who exit the fund on the 5th or 6th day from purchase. 

As intimated by SEBI,  the graded exit loads  are as follows :

Investor Exit Upon Subscription Exit load as a % of the redemption process. 
Day 1 0.0070%
Day 2 0.0065%
Day 3 0.0060%
Day 4 0.0055%
Day 5 0.0050%
Day 6 0.0045%
Day 7 onwards  0.0000%

However, the exit load is still very less and will not drastically affect you as an investor. Let’s look at a simple calculation. Suppose your investments is worth Rs 10,000 when you redeem your units. If you do it the next day from purchase, the amount you are liable to pay as exit load is just Re 0.7. So if for some reason you have to withdraw your funds, immediately after investing,  the price to pay compared to the investment, is still very low. Let us now see the rationale behind the move. 

Reasons Behind The Move 

The move primarily aims to discourage corporates from using liquid funds as a means to park money for the short term.  Many fund managers have reported a trend wherein 30% of money invested by liquid funds, has been redeemed within a week.  This is to protect the interests of retail investors such as you, who may face the risk of poor liquidity and credit issues in the debt market, due to large redemptions by corporates. Now unlike retail investors, corporates invest in crores and when the investment amounts are huge. Considering the exit loads run in lakhs, this is a significant deterrent. 

What Should You Be Aware Of 

 Many liquid funds have been offering instant redemption facilities. Funds such as Axis Liquid funds, HDFC Liquid fund, IDFC liquid fund, DSP Liquid Fund, ICICI Prudential Liquid fund, Nippon India Liquid fund, etc, allowed investors to withdraw up to Rs 50,000 or 90% of the invested amount, whichever is lower, upon 30 minutes from placing redemption request. Going forward, as per the SEBI mandate, if you have invested in these funds you will be required to pay exit loads according to the aforementioned rates, based on when you withdraw. 

What Should You Do? 

The move by SEBI is to protect the interests of retail investors by reducing volatility in liquid schemes’ AUM. While this may seem inconvenient to you as an investor, this problem is easily solvable. If you have invested in liquid funds for the purpose of building an emergency corpus, wait till a week elapses from the purchase date before you redeem. That way you wouldn’t be subjected to an exit load. If you think you would be requiring money anywhere within a week to a month, then you can go for overnight funds. Remember, always align your liquidity needs with your time horizon and then go for the most feasible option. 

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww