Liquid funds have increasingly become a preferred option to park surplus ‘liquid’ funds by individuals and corporates. As of Sept 2019, 590K crore which comprises of about 25% of the overall industry. Our earlier post on ‘How Safe Are Liquid Funds‘ still stands relevant till date.
SEBI has introduced a graded exit load on Liquid funds with effect from 20 Oct 2019. The load structure which will be deducted from the investments is below :
For redemptions within 7 days :
- 1 day – 0.0070%
- 2 days – 0.0065%
- 3 days – 0.0060%
- 4 days – 0.0055%
- 5 days – 0.0050%
- 6 days – 0.0045%
- 7 days – NIL
To understand its implications, please refer to below (Source ICICI Prudential Mutual Fund)
While most of the investors park their money for a duration of more than 7 days, it is not ‘improbable’ that one may need the funds earlier. This may be more likely for big corporate deposits where Liquid funds have to started to become a preferred source of treasury management. You would notice above that any redemption prior to 7 days may materially reduce the annualized returns.
This change was aimed to discourage big sums of money being invested in liquid funds for a very short duration. Liquid funds have been holding material amount of money in underlying instruments which would have maturity tenure of more than 7 days.
Investors having a requirement of investing shorter than 7 days duration can look towards Overnight funds which have a maturity duration of 1 day.
In addition, SEBI has mandated the fund houses to invest atleast 20% of its net assets in liquid assets such as Cash, Government Securities, Treasury Bills and Government Repo securities.