Bharti Axa Mutual Fund recently joined SBI Mutual Fund to scrap exit loads from some of their equity schemes. These steps were described as ones that would empower retail investors but it is unlikely that other fund houses will follow them, says Ravi Samalad.
Bharti Axa Mutual Fund waived exit loads on its three equity funds from September 1, 2010. SBI Mutual Fund had withdrawn exit load on its SBI Blue Chip Fund scheme from July 1, 2010. Exit load is a charge a mutual fund levies when an investor redeems his investments.
The scrapping of exit loads is certainly investor friendly, but it is unlikely to be followed by other fund houses as they feel a blanket withdrawal of the charge would not be in the interests of existing investors. They feel such a move would attract short term investors. There is no exit load when an investor withdraws his investments after one year from most mutual fund schemes.
Typically, mutual funds charge 1 per cent exit load if an investor exits a scheme before one year. Some schemes charge a higher exit load (around 3-4 per cent) during the first six months and reduce it during the course of the scheme.
“This is suicidal. There are people who tell investors to park big money in a fund. They take the upfront commission, and switch to some other fund. If they take out the money there will be a big hole in the scheme, which is detrimental to investors who remain invested,” said the marketing head of a public sector fund house, not wanting to be identified.
Some fund houses have described the move as an imprudent one. “When we did not have exit load earlier, we declined big ticket investments because we knew that the intention of those big players was to come in and go out of the scheme within two or three days,” the marketing head said.
Exit loads are seen as a hurdle for very short-term speculative investments. “A new fund house can waive exit load for some time to attract distributors but it is not in the interests of old investors,” said the marketing head of another fund house.
Some say that big investments usually come in a no exit load scheme when the market is climbing. This allows large investors to exit and make quick profits. Such investors may also get an additional return if they get a share in the commission earned by the distributor from the fund house, alleges the marketing head of the public sector fund house quoted above.
In a bid to prevent such short term practices, a majority of the fund houses have reduced upfront commissions and hiked trail commission, an incentive paid if the investor stays invested.
The absence of exit load could result in higher churning. The mutual fund industry has lost Rs 14,624 crore from equity schemes till September end in this financial year. In the absence of adequate incentive, distributors are less inclined to sell mutual funds which are affecting fresh sales, say industry observers.
After the regulator abolished entry loads, several fund houses either hiked exit loads to pay commissions to distributors or extended holding time period from one year to three years. In the case of UTI’s Retirement Benefit Pension Fund the exit load is applicable up to five years. Franklin Templeton, Reliance, Fidelity and ING Vysya were among the fund houses which hiked the time limit of exit loads to three years after the regulator removed entry loads.
