Every investor has different preferences when it comes to managing their funds. Some prefer liquidity all the time, while others are comfortable with a longer investment horizon. Those who prefer liquidity often keep their surplus cash in savings accounts for short term needs. They want to be able to access their funds at a moment’s notice without having to worry about penalties or restrictions.
However, there’s another option that can provide both liquidity and better returns than a savings account – liquid mutual funds. These open-ended debt mutual funds invest in short-term debt and money market securities with a maturity of up to 91 days, thus, offering a high level of liquidity without compromising on returns and safety.
But, like with any investment, certain costs are associated with liquid funds. And there’s one factor that every investor must consider: the exit load. This is an expense that investors incur, and it could impact their overall investment returns.
What is the exit load?
Mutual fund investments require you to pay an exit load when you redeem your fund units before a specified time frame. In simple words, it is a charge that the fund house applies for the early withdrawal of your investment.
Liquid mutual funds are short-term investment options that typically do not have any exit load if investors hold on to their units for a minimum of seven days. However, if the units are redeemed before that, the fund house may apply an exit load depending on the holding period, and the percentage is charged on the NAV or Net Asset Value.
For instance, a 0.007% exit load may be charged for investments redeemed within 24 hours of purchase, and a 0.006% exit load may be charged if the investor exits the fund after two days. The exit load percentage usually decreases with time and varies based on the holding period.
There are no exit loads applicable from the 7th day.
Importance of exit load in liquid funds
With exit loads, liquid funds aim to:
- Discourage short-term trading: Exit load discourages investors from withdrawing their investments before a specific time period to prevent short-term trading.
- Protect against market fluctuations: The imposition of an exit load in liquid mutual funds further protects against market volatility. It enables the fund to handle market downturns and reduces the redemption pressure during economic uncertainty.
- Encourage discipline: By setting a specific duration for the exit load, liquid funds encourage investors to have a disciplined approach towards investing. This is beneficial for the investors as well as the fund.
- Recover costs: Mutual Funds impose exit loads to recover costs due to the early redemption of units. This cost recovery ensures fund managers have sufficient funds to manage the portfolio.
- Promote accountability: Exit loads in mutual funds promote transparency and accountability by discouraging ambitious investors from manipulating the market and generating quick profits at the expense of others.
Learn the most practical way to avoid exit loads on liquid funds
There are a few practical ways to avoid exit loads on liquid funds. Firstly, hold the investment until the exit load period is over so that you do not lose out on your returns due to exit loads. Do your research and choose funds that have lower exit loads. Read the offer documents and prospectus carefully to understand the exit load rates applicable during the holding period. Plan your exit well and withdraw the liquid funds at the right time to avoid paying an exit load.
Most importantly, it is always a good idea to consult a financial advisor who can guide you on the best investment strategies and practices.
