The Hindu Business Line : MFs raise exit barriers to prevent churning by investors

Increasing number of mutual fund houses are gearing up to battle the no-entry-load regime, which will come into effect on August 1, by raising exit barriers for investors.

Fund houses such as HSBC Mutual Fund, Tata Mutual Fund, Kotak Mutual Fund and Escorts Mutual Fund have already announced that they will increase their exit loads. Other fund houses such as IDFC Mutual Fund and Mirae Asset Management Co too are planning to follow suit.

According to a senior official with IDFC Mutual Fund, the hike in entry load will not only prevent churning of portfolio, but also ensure better returns to the investor as the funds would be locked in for a longer duration

Mutual fund industry observers said that with investors expected to stay put in mutual fund schemes following the no-entry-load regime and hike in the exit load, distributors would be assured of trail brokerage. Further, the increase in exit load gives AMCs room to pay a maximum of one per cent of the commission to distributors including use for other marketing and selling expenses. The rest has to be invested back into the scheme, according to the SEBI mandate.

“You have to see that the investors stay invested for a longer duration and this move is an effort in that direction. In the no-entry-load a lot of asset management companies might have to support the distributor with front end commissions. But since AMCs operate on wafer thin margins, they will have to retain the investor to make that much money,” said Mr Jaideep Bhattacharya, Chief Marketing Officer of UTI Mutual Fund.

load structure

HSBC Mutual Fund has revised the load structure in six schemes with effect from Saturday, according to a notice from the fund house. The exit loads on these schemes have been raised to 2 per cent on investments below five crore redeemed within one year from allotment, while redemption after one year but within two years from investment will attract one per cent.

The increase in the exit load will in no way harm the existing investors of the scheme, said an official at Tata Mutual Fund.

“In the evolving scenario, increasing the exit load is a logical step and we will also follow suit”, said Mr Arindam Ghosh, CEO of Mirae Asset.

Tenure

It is not only the rate of exit load which has to be increased, but one also has to focus on the tenure for which the exit load is applicable, he added. If the tenure of investment on which the exit load is applicable is stretched, then the investors would stay invested for a longer time in the fund, Mr Ghosh said.