In a bold move, HSBC Mutual Fund decided to scrap exit load in all its schemes from March 01.
HSBC Mutual Fund announced yesterday its plan to remove exit loads from all schemes from March 01, 2013. HSBC is perhaps the first fund house to do away with exit loads completely. It is not known for how long HSBC will operate on zero exit load policy. Puneet Chaddha, Director & CEO, HSBC Mutual Fund said that the fund house would monitor investor and distributor behavior and in case any systemic abuse was noticed, they would consider steps to redress the same.
When asked if removing exit load could encourage churning, Puneet said “I don’t expect this will lead to excessive churn. Our own research of investor behaviour in our equity funds suggests that if the product is distributed in the right manner, it leads to greater persistency. For instance, more than 80 % of our equity investors have continued to remain invested after the exit load period of 1 year, with over 66 % preferring to remain invested over two years i.e. well after the exit load period.”
On the fear that the move would attract short-term investors, Puneet said “There may be a very small section of investors who may see this as an opportunity to make short term investments but then they would have to consider the impact of short term capital gains tax. Also we believe the benefits to the larger cross section of investors will far outweigh this very small segment of high transactors.”
Exit loads have traditionally been used to deter investors from early withdrawals. Fund houses are required to plough back exit loads proceeds to the scheme in order to benefit existing investors.
Normally, most equity funds charge 1% exit load if investors move out within one year. Recently, some fund houses like ICICI Prudential and Axis hiked exit loads to 3 per cent under some of their flagship equity funds.
Other fund houses are not so enthused by the idea of scrapping exit loads and it seems unlikely that many fund houses will follow suit. “Removal of exit loads entirely may impact the performance of the fund as investors could come in and go out anytime. An exit load is an indirect indication to investors that they have to stay invested for say at least six months in a debt fund or one year in case of equity fund. It could also promote bad selling practices,” feels a sales head of a private sector fund house.
“If exit loads are done away with in all categories of schemes then there is no difference between a liquid and an equity fund. It is a good sales strategy but it may not work in the long term. Earlier fund houses were allowed to use up to 1% of exit load corpus but now exit loads have to be written back to the scheme. So there is no incentive for a fund house. Further, it may impair the fund manager’s ability to manage a scheme,” says a CEO of a mid-sized AMC.
