Let’s consider a Balanced Fund, which aims to provide growth and capital appreciation from the equity portion, and income and stability from the debt portion. This scheme still carries considerable risk, as the portion of equity could be as high as 75%. This is recommended only for investors with a healthy risk appetite and long term time horizon.
The fund management team of such a scheme would ideally want only long term investors who share their conviction of staying invested for a long period, of a minimum of 3 years. Thus the fund may impose an exit load of 1% for all redemptions done before 3 years. In such a case, the fund is not impacting liquidity directly, but is discouraging investors from exiting before a period of 3 years.
The advantage for the scheme would stem from the fact that all investors are aligned to a longer time horizon. This would be a comforting factor for the fund manager, enabling him to pick securities with such a thought in mind. In the fund manager’s view such a strategy would enable better fund performance, as there would be no short term investors and redemptions impacting a long term strategy.