Exit loads are used as sales strategy tools by fund houses to accommodate large investors. What does it mean for your clients?
In order to treat all kinds of investors equally, SEBI, in September 2012, asked fund houses to scrap multiple plans (liquid, liquid plus, institutional, super-institutional, etc.) within a scheme. The expense ratios of schemes within different plans also differed. For instance, retail investors were charged a slightly higher total expense ratio (TER) than institutions.
Now, a single scheme accommodates retail, HNIs and institutional investors. With the variance in investment style of different kinds of investors, do existing investors in the scheme suffer?
“There is nothing wrong with it as SEBI allows it. It is mainly a sales strategy to accommodate new investors. For instance, an institution may want to invest in a PSU fund for three or six months it may ask the AMC to reduce the tenure or scrap exit load. It may prove detrimental for existing investors. Exit loads are also changed due to a change in the investment outlook of a fund manager,” says Vinod Jain of Jain Investments.
While fund houses change exit load structures to prevent early withdrawals or if there is a change in the fund manager’s outlook, some distributors say such changes are not required. “Some schemes change exit load every quarter. It becomes difficult to keep track of exit load changes. If the markets have rallied why should fund houses stop investors from booking some profits? It is unfair. The exit load should be uniform across equity schemes. It is not AMCs job to decide when investors should enter and exit. It should be left to financial advisors,” said a Hyderabad based financial advisor.
To some extent, retail investors are now safeguarded from the exit and entry of large players in a fund since now that we have direct plans which are meant for more informed investors. But some institutions still continue to invest in regular plans through distributors.
While some distributors say that frequent changes in exit loads should not happen in debt funds, they are appreciative of the fact that AMCs have hiked or increased the tenure of exit loads in equity funds. “Changes in exit loads affect those who trade in mutual funds. Equity funds are long term products; it is better if fund houses hike exit loads in such schemes,” said a Mumbai based distributor who manages assets under advisory of Rs. 400 crore.
“It is like a signal to investors. Sometimes, large investors invest in a fund and they are worried if other investors redeem it could create loss for the scheme. Thus, some AMCs hike or increase the tenure exit load to dissuade redemptions. The problem is not so much in equity funds as they are marked to market. In debt funds, the loss from selling securities could be higher than what one would pay for exit load,” says Sunil Subramaniam, Deputy CEO, Sundaram Mutual Fund.
Unlike in the earlier regime when exit load kitty was used for marketing purpose, now fund houses are required to plough back exit load money in the scheme. This benefits the existing investors in the scheme.
Some are of the view that there is nothing wrong in changing exit loads as this practice is adopted globally by asset managers.
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