What is Graded Exit Load on Liquid Funds (2020-21)?

The exit loads on Liquid Funds have undergone a change. From now on, i.e. with effect from October 20,2019, Graded Exit Load will be applicable on all investments in liquid funds.

So what is the new graded exit load structure for liquid funds?

Redemptions up to 7 days will have exits loads as follows:

  • Exit/Sale in Day 1: 0.0070% of Liquid Fund redemption proceeds
  • Exit/Sale in Day 2: 0.0065% of Liquid Fund redemption proceeds
  • Exit/Sale in Day 3: 0.0060% of Liquid Fund redemption proceeds
  • Exit/Sale in Day 4: 0.0055% of Liquid Fund redemption proceeds
  • Exit/Sale in Day 5: 0.0050% of Liquid Fund redemption proceeds
  • Exit/Sale in Day 6: 0.0045% of Liquid Fund redemption proceeds
  • The redemptions will be free of exit load from the 7th day onwards, post allotment of liquid fund units. That is Nil exit load after 7th day in Liquid Funds.

The old exit load structure is no longer valid. And the new graded exit load structure has been notified via SEBI Circular dated September 20, 2019. So exit load on liquid funds will be levied on a graded basis going forward.

Here is a simple illustration to show the impact cost on the investor.

Suppose you invest Rs 5 lac in a liquid fund on 1st January 2020. Now lets say you need Rs 1 lac. So you can redeem liquid funds worth Rs 1 lac. Depending on the day of redemption, you will be paying following exit loads:

  • Redeem on Day 1: Rs 7.0 on Rs 1 lac redemption on 1st Jan 2020
  • Redeem on Day 2: Rs 6.5 on Rs 1 lac redemption on 2nd Jan 2020
  • Redeem on Day 3: Rs 6.0 on Rs 1 lac redemption on 3rd Jan 2020
  • Redeem on Day 4: Rs 5.5 on Rs 1 lac redemption on 4th Jan 2020
  • Redeem on Day 5: Rs 5.0 on Rs 1 lac redemption on 5th Jan 2020
  • Redeem on Day 6: Rs 4.5 on Rs 1 lac redemption on 6th Jan 2020
  • Redeem on/after Day 7: Nil on Rs 1 lac redemption on 7th Jan 2020

So if you want a thumb rule or Liquid Fund Exit Load Calculator, then think of it like this. If you exit/redeem your liquid fund within the first 7 days, then you will be paying Rs 4.5 to Rs 7.0 per lac. That’s a simple estimate for exit load calculation for liquid funds.

Does Liquid Fund have exit load? Yes it does. And now you already know what is exit load for liquid funds in 2020-21 in India.

Other way of reading the above information is that as per the new graded exit load structure, holding liquid fund for one day would have an exit load of 0.007 per cent, two-day will have 0.0065 per cent exit load, followed by 0.006 per cent, 0.0055 per cent, 0.0050 per cent, 0.0045 per cent for the third, fourth, fifth and sixth day respectively. There is no exit load on liquid funds from seventh day onwards.

But there is another angle to the impact of these exit loads on returns from liquid funds in first seven days.

No doubt the percentages look small in absolute terms. But have a look at this example. Suppose you invest Rs 1 crore in liquid funds. At 7% annual estimated returns, this Rs 1 crore can earn Rs 7 lac in one year. This translates to Rs 1917 per day. Now exit loaf of 0.0045% to 0.0070% on Rs 1 crore means Rs 450-700 in a day. So the exit load of Rs 700 would eat into a lot of one-day return of liquid fund if you redeem it in a day. Right?

So why was this graded exit load introduced by SEBI and based on recommendations of AMFI?

It is primarily aimed at deterring large corporates from using liquid funds to park their money for very short periods. Nothing wrong with that. But problem arises when large purchases and redemptions from corporates ends up amplifying the risks in liquid funds for small retail investors, more so in times of poor liquidity or rate credit events in the debt market. This move will encourage corporate investors in liquid funds to look at using overnight funds instead, for parking their money for very short durations of less than a week or few days. As per the debt fund categories, liquid funds can invest in securities with a maturity of up to 91 days while overnight funds are mandated to invest in any securities with maturities of only up to one day.

So this move is expected to reduce the risk from large short-term inflows and redemptions in liquid funds. Common investors have nothing much to worry about due to the impact of exit loads on liquid funds. Most of them do not consider parking money only for 7 days. So no impact as such.

There has also been a change in cut-off timing of liquid funds.

The earlier cut-off timing for the day was 2:00 PM. However, with effective from 21st October 2019, the new cut-off timings is 1:30 PM. So if you invest before this new cut-off timing (i.e. 1:30 PM), then you are eligible for the same day’s NAV. If you invest after the cut off timing, then the next day’s NAV will be considered for your investments in debt funds.

But there are no changes in taxation of capital gains from liquid funds or in taxation of debt funds in general.

So that was all you wanted to know about the Graded Exit Load in Liquid Funds (2020) in India effective from 21st October 2019. So now onwards, you will have to pay exit load in Liquid Funds if you redeem within first 7 days as SEBI has introduced the graded exit load for Liquid Funds.

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