MFs modify exit load structures

MFs modify exit load structures

Mutual fund investors may have to stay with their schemes for as long as three years, if they wish to avoid the exit load being imposed by funds, in response to the entry load waiver. While the no-entry-load regime takes effect from August 1, many mutual funds have been hiking their exit load or increasing the period of holding, before which one would have to pay to exit. While in some schemes one may have to stay invested for at least a year to avoid the exit charges, a f ew other funds require a three-year holding period to avoid such charges. Note that only a maximum of 1 per cent of the exit load can be used towards marketing expenses or distributor commission. The rest of the amount would be credited to the scheme and would go to increase the NAV of the investors who stay invested.
What is an exit load?

An entry load is a charge levied as a percentage of the existing NAV at the time of exit, if such exit is made within the time specified in the scheme. The primary objective of an exit load is to deter investors from exiting a fund within a short span, as frequent churning increases the costs incurred by the scheme.

Besides the above purpose, exit loads are also charged to cover advertising and other expenses related to managing the scheme. Mutual funds may also use it to pay the distributors. There is no rigid rule for utilisation of such loads. Hence, mutual funds would now be free to use the load to pay distributors. This is, in other words, a kind of deferred sales charge; the longer you hold, your charges become lower or even nil. For instance, a fund many charge 1 per cent if you exit within a year and 0.5 per cent if the exit is within two years of investing in the fund.
Why the change?

Investors may recollect that in June the mutual fund industry regulator, the Securities and Exchange Board of India (SEBI), proposed to remove the entry load for all mutual funds and instead allow investors to pay the upfront commission directly to the distributor. This proposal takes effect from this month.

Simply put, investors would not be charged such entry load (by way of deduction from their investments) and would receive more units than they did earlier, as the entire amount is invested. They would, instead, pay a mutually agreed commission to the distributor. This, however, meant that mutual fund houses, which had for long been using the entry load to pay their distributors, would not be able to do so.

To enable asset management companies (AMCs) to pay commissions to the distributor, many funds have changed their exit load structure over the past four weeks.
The changes

Several fund houses have announced changes to their exit load structure through advertisements realased this week. Among the larger fund houses, UTI Mutual for instance will charge an exit load of 1 per cent for most of its equity schemes, if the investor sells the fund within three years (one year for index funds) of its purchase. This cap was earlier one year.

In the UTI”s Retirement Benefit Pension Fund, the holding period to avoid exit load is as high as five years. Similarly, most equity schemes offered by AMCs such as Franklin Templeton India, Reliance, Fidelity, Bharti Axa and ING Vysya have upped the time limit for charging exit load to three years.

For schemes under Kotak Mutual the above time-frame is two years while HSBC charges a load of 2 per cent for exits made before a year. Many other funds are yet to announce any increase in the exit barriers. Exit load for extended time-frames may well urge investors to hold on to their funds for a longer period. Investors may thus be able to achieve the true objective of mutual funds — ‘capital appreciation over the long term’.

However, the move also means that investors have to be more discreet in their choice of mutual funds. Opting for a poor fund or one with no track record may mean suffering poor returns or paying a price to exit the underperformer.

Extended exit load time-frames may make investors hold on to their funds longer, enabling them to earn capital appreciation over the long term.