Exit Load on Liquid Funds

On September 20, 2019, Sebi instructed AMFI to define an exit load structure for the liquid mutual funds.

Why was this required?

The move came to protect retail investors from extreme volatility in liquid funds. Liquid funds are used by corporate as well as retail investors to park money for the short term. However, it was seen that most of the corporate investors used to invest a big corpus for a very short term. Such big transactions used to result in NAV fluctuations and hence it adversely affected retail investors.

We had covered the entire thought process that led to this change back in November 2018.

Newly implemented Exit Load Structure:

With effect from October 20, 2019, the exit load will be applicable to liquid funds if redeemed within 7 days of investment. The exit load structure applicable is as follows:

Additionally, the cutoff time to invest in liquid and overnight funds has also been changed from 2 PM to 1.30 PM. That means, if you want to invest in the liquid or overnight fund category, the fund house should receive the money before 1.30 PM to get the previous day's NAV. If the money is received by the fund house after 1.30 PM the same-day NAV will be applicable.

What should you do now?

If you want to park money for less than 7 days, you can opt for overnight funds. Another alternative to liquid funds is an ultra short term category with no exit load. Ideally, you should hold your investment in ultra-short-term funds for at least 3 months for better return prospects.

All of these changes are done in the face of credit defaults in the debt industry. Hence we cannot emphasize enough the importance of selecting a debt fund based on its quality. You can read our blog on selecting suitable debt funds which will help you in your fund selection.