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In a move that will reduce volatility in liquid fund inflows, capital market regulator Sebi has recommended a graded exit load starting from 0.0070 per cent to 0.0045 per cent, reducing 0.0005 percentage points every day in all liquid funds starting October 20.
No change in the exit load structure should be made without prior consultation with Sebi, said sources in the know. However, since interest rate scenario can change overtime, the load structure should be reviewed annually by AMFI in consultation with Sebi, he said.
Mutual funds profit
The move to levy exit load on liquid funds is expected to boost mutual funds profit. However, liquid fund investors who are largely corporates and high-networth investors will quickly adjust their investments to narrow the impact of exit load.
As of September-end, the asset under management of liquid scheme was the highest among all other categories at Rs 3.88 lakh crore, though it witnessed an outflow of Rs 1.41 lakh crore. The AUM of over-night fund stood at Rs 13,852 crore and saw an outflow of Rs 1,605 crore last month.
Volatility in liquid fund AUM
The asset under liquid fund management could drop by 20-25 per cent once the exit load is levied. Most institutional investors who deploy their overnight liquidity in liquid funds will now shift to overnight funds or invest directly in Triparty Repo. Levy of exit load will reduce volatility in liquid fund AUM as only money that be invested for six day will now flow into the fund.
Investors would consider overnight funds, which has no exit load, for parking short term surplus of less than seven days. Tightening norms further, Sebi had mandated that liquid funds should hold at least 20 per cent of its net assets in liquid assets such as cash, government securities, treasury and repo on government securities from April 1, 2020.
In case, if the investment in liquid asset falls below the mandated 20 per cent mark, Sebi said the fund house has to make up for the shortfall before taking any further învestment decision.
Funds which are maintaining lower liquid assets so far could see their returns getting impacted. Most large liquid funds with AUM of over Rs 10,000 crore maintain 10-15 per cent in liquid assets.
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