Mutual Funds

Impact of exit load on Liquid Funds and what it means for everyone?

What is meant by liquid funds?

On October 15, 2019, SEBI had introduced a graded exit load for redemptions made within 7 days from the date of investment. The graded exit load ranges from 0.0070% to 0.0045%.

This move was introduced to bring in more stability into liquid funds and protect the retail investors. Corporates would park their large sums of surplus money for extremely short periods in liquid funds. High volume redemptions by corporates would put the fund under redemption pressure which would lead the fund to sell securities at a discount to the market price, effectively diminishing returns for retail investors.

In order to curb this practice by corporates, and protect the small and retail investors, SEBI introduced a graded exit load in mutual funds.

Liquid Funds – Assumptions

Investment Amount (Rs) 10,000,000.00
Returns – Liquid Funds 5.00%
Returns – Overnight Funds 3.50%
Days Exit Load Value in Liquid Fund (Post Exit Load) Annualised Returns (XIRR%) Value of Overnight Fund Annualised Returns (XIRR%) Preferred Investment
             
Day1 0.0070% 10,000,670 2.45% 10,000,959 3.50% Overnight Fund
Day2 0.0065% 10,002,090 3.81% 10,001,918 3.50% Liquid Fund
Day3 0.0060% 10,003,510 4.27% 10,002,887 3.50% Liquid Fund
Day4 0.0055% 10,004,930 4.50% 10,003,836 3.50% Liquid Fund
Day5 0.0050% 10,006,351 4.64% 10,004,795 3.50% Liquid Fund
Day6 0.0045% 10,007,772 4.73% 10,005,755 3.50% Liquid Fund
Day7 0.0000% 10,009,593 5.00% 10,006,711 3.50% Liquid Fund

Analysis:

Impact :

We assessed the impact of the liquid fund exit load to see how net returns are affected, and will there be a shift of monies towards overnight funds. Based on our initial assessment we surely feel inflows in liquid funds will continue. From an annualised net return(XIRR%) standpoint, overnight funds will yield better returns when liquid fund investments are made just for one day/overnight (5.75% in overnight vs 4.54% in liquid).

However, day 2 onwards, liquid funds will be able to generate higher returns than an overnight fund, inspite of the applicable exit load.

We do not see massive changes in the AUM of the liquid funds. The biggest beneficiaries here are AMC who will be able to generate revenue in the form of exit load for all early redemptions.

Conclusion:

Liquid funds still will be the preferred investment mode compared to overnight funds, savings account, and bank deposits. Going forward, we can expect SEBI to increase exit load on liquid fund if large investors are still using them to park surplus funds overnight.

Impact on Tarrakki Zyaada:

Tarrakki Zyaada is Tarrakki’s flagship prodcut in partnership with Nippon India AMC. Tarrakki Zyaada provides users an investment linked debit card which allows investors to redeem their liquid fund investments at any VISA POS or ATM in India. Tarrakki Zyaada debit card literally acts like a bank debit card.

We do not see any impact on Tarrakki Zyaada as most of our users do not use Tarrakki Zyaada as an overnight investment product. Investors invested in Tarrakki Zyaada will still be able to make higher returns than their savings account and several bank deposits.

Check out our recent coverage on Tarraki Zyaada in the Economic Times.

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