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Was reading about the liquid funds and came across this sentence on one of the sites:

Considering that liquid funds are ideally suited for investments that may be required to be redeemed at a short notice, most of the funds in this category do not have any exit load.

I know liquid funds can be redeemed in a day. But I don't understand what it is the connection between period before redemption and exit load. Does this means that since redemption can be done at very short period of time, it all happens electronically and thus does not involve much processing efforts on the side of fund house, thus there is no exit load?

I am absolutely new to finance so trying to understand what and most importantly why of it. Also was trying to create a new liquid-fund tag but poor reputations didn't allowed me to do so. So tagged debt since liquid fund is a kind of debt-funds

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I think you are having trouble understanding what 'liquid' means. Liquidity refers to how easily an asset can be converted to cash. More liquid = more easily converted to cash, less liquid, less so. Any kind of exit load is going to make an asset less liquid due to the penalties associated with making the sale.

So, the whole point of liquid funds is to give people the option of selling quickly if they need to. Since an exit load is meant to discourage this behavior, liquid funds tend not to have one. The point isn't what the financial institution 'gets', it's about offering a service to clients with a particular investment need.

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Imagine that a fund had a large exit load that declined over several years. If you wanted to sell some or all of your investment in that fund you would face a large fee, unless you held it a long time. You would be hesitant to sell because waiting longer would save you money. That is the exact opposite of a liquid investment.

Therefore the ideal level for a liquid fund is to have zero exit load.

  • So does that mean liquid investment held for long duration face more exit load than one held for short duration? And if yes by what logic? I mean why fund houses will do that? What they will get if investors withdraw money early? – Mahesha999 Aug 24 '14 at 15:32
  • Funds which are set up this way believe they can make a sufficient profit off account maintenance fees and/or purchase-time loads. It's all tradeoffs. One of the advantages of index funds is that the costs of running the fund are lower, so there's less that the investors need to be billed for. – keshlam Aug 31 '14 at 21:52

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