Do you know from now onwards you have to pay exit load in Liquid Funds if you redeem within 7 days? Let us see the Graded Exit Load in Liquid Funds effective from 21st October 2019. SEBI Introduced the graded exit load for Liquid Funds.
Why exit load in Liquid Funds?
Earlier there was no exit load in Liquid Funds. You are free to withdraw even on the same day. However, many of you may be aware that due to lot of issues debt space, SEBI introduced two changes and they are as below.
# Liquid funds will hold at least 20% of net assets in liquid assets (Cash, Government Securities, T-bills and Repo on government Securities) from April 1, 2020.
# Introduction of graded exit load.
These two norms as per SEBI will bring in lower volatility and higher safety to Liquid Funds. Due to 20% of net assets in liquid assets means the fund will not experience a sudden exit pressure during bond market stress. Also, due to the graded exit load, the fund will not experience sudden liquidity issue especially from corporate.
Even though these two measures are meant for safety and reduce volatility. But it in no way serve the purpose of Liquid Funds.
Many of us (including corporates), invest in Liquid Funds just because to park our idle money. If there is an exit load and also returns a bit lower due to 20% of net asset in liquid assets means many may switch to safer and liquid fund category like Overnight Funds.
Usually, many Liquid Funds hold around 10% in cash mode to manage the liquidity issue. However, to generate higher returns sometimes fund managers may hold less cash. For example, in the case of the HDFC Liquid Fund, the cash holding is around 3.56%. However, the Quantum Liquid Fund is holding around 18% in cash mode.
Same way, ICICI Liquid Fund holding no cash at all. However, Parag Parikh Liquid Fund is holding around 18% in cash mode. (Data as on 30th Sept 2019).
Hence, to bring in uniformity. SEBI proposed at least 20% in cash holding. This will reduce the liquidity pressure and lower impact on NAV volatility.
Graded Exit Load in Liquid Funds Effective from 21st October 2019
Let us now look at the graded exit load in Liquid Funds Effective from 21st October 2019.
Hence, to exit from Liquid Funds without any exit load, you have to wait for 6 days’ completion. On the 7th day only you have allowed withdrawing without any exit load.
New Cut-Off Timing for Liquid Funds effective from 21st October 2019
Along with the above changes, SEBI also did the changes to Cut-Off Timing for Liquid Funds. The earlier cut-off timing for the day was 2 PM.
However, with effective from 21st October 2019, the new cut-off timings is 1.30 PM.
Suppose you invest before this cut-off timing, then you are eligible for the same day NAV. Otherwise, the next day NAV will be considered for your investment.
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Bangarappa
Hi Basu,
Can you please clarify how the sequence of redemption is calculated?
Suppose I buy 100 units on 1st October and another 50 units on 20th October.
Now I place redeem request for 50 units on 21st October.
Is the graded exit load applicable now? Is the calculation is FIFO based and hence no exit load since my investment on 01st October is considered?
thanks
Bangarappa
Basavaraj Tonagatti
Dear Bangarappa,
It is obviously on FIFO basis.
Al
It’s time for SEBI to step in and abolish all exit loads on all funds, like they abolished all entry loads a few years back. Otherwise, AMC’s will continue playing games and keep tacking exit loads as and when their revenues dip.
Basavaraj Tonagatti
Dear AI,
Exit load is a layer to protect sudden liquidity issue faced by AMCs. AMCs as per their wish can’t put exit load until and unless there is a issue.
Pet
Is overnight funds better than liquid funds. Can you write an article on different liquid funds to park short term money like overnight funds. I am only investing in LiquidBees but it’s very opaque in terms of divided payment. I am not able to find what is actual rate of return. Thanks in advance
Basavaraj Tonagatti
Dear Pet,
Yes, for safety and liquidity purposes (if you need within 7 days). Refer my post “Best Debt Mutual Funds to invest in 2019 India” on my recommendations. First decide what you actually need from the investment. Based on that either choose Overnight Funds or Liquid Funds.
Pet
Dear Basavaraj,
Thanks for excellent article on debt funds and I see you also wrote latest article on overnight v/s liquid funds. Thanks so much.
One thing I am confused is about Liquidbees. Many sites say there is no tax implications on Liquidbees as it gives units as divided and not real money as divided in your accountis that true? Also what about Dustin Liquidbees? Is it good in terms of tax to park money in overnight funds or Liquidbees (as no tax here)? Will be really helpful to get answers from you. As always thanks for your articles, they are really good, informative and huge help to us.
Pet
Typo. Also what about DDT Liquidbees?
Basavaraj Tonagatti
Dear Pet,
Liquidbees are out of my purview the reason is EXPENSE ratio and DEMAT holding. A simple Liquid or Overnight Fund fulfilling your requirement, then why to experiment?