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Personal Finance

Mutual Funds Hike Exit Loads, Hoping This Time Investors Will Stay

In a strange move, Mutual Funds are increasing exit load time frames. This is usually a desperate situation by MFs to retain investors, or they are just using the current interest in equity funds to ensure that these investors stay even if the market gets volatile.

 

Mutual Funds Hike Exit Loads, Hoping This Time Investors Will Stay

(Pic from the Business Standard Article)

Even bond funds haven’t been spared! Sure, the recent budget has made it less lucrative to exit fixed income funds within 3 years (short term capital gains tax applies) but surely, that should be incentive enough for people to stay.

While funds charged a 1% exit load in the past for about a year, it was mostly so after SEBI removed entry loads on funds. Funds used the 1% exit load to reimburse distributors, until a change in SEBI rules in 2012 ensured that the exit loads would be placed in the fund’s balance instead, not to be used for reimbursements.

Given this change, exit loads are not just incentives for customers to stay, but also for funds to ensure that such loads will enhance the performance of the scheme itself. If half of the investors of a fund exit, then 1% exit load will increase performance by 0.5% (since that much money will be credited to the scheme).

We don’t know how much performance of a fund is due to Exit Load and how much is due to the fund’s investing abilities. Is the increased Exit load a way to show higher performance in a situation that the market falls? (and people exit?)

The standard excuse is that this is a way to get investors to stay invested. Or that this will reduce distributor churn. But it’s not apparent that people, in the face of falling market prices, will consider the equity load as a barrier to exit. Usually an exit load is simply their feeling of just another fee that a fund has charged them after losing their money, which makes them want to never invest again. And then, the fund industry will complain that people don’t trust funds.

In a refreshing twist, HSBC Mutual Fund has removed all exit loads from its funds. (Motilal Oswal fund has also done so, but it’s a tiny mutual fund really) Hopefully we will see a lot more funds like them – according to me, arbitrary barriers like entry loads will only deter the market’s growth.

When have funds gone out advertising existing, well performing schemes? They all try to introduce new schemes, some with overlapping objectives, and confuse investors. At the same time they have big exit loads and complicated entry and exit procedures – it almost seems like they’re telling us that we can invest but we have to pay an arm and a leg for the privilege.

  • Shyam says:

    Though I can see ur logic against using exit loads, we must also consider the plight of the fund manager and other long term investors in those funds. Without exit loads, MFs will become just another ETF with short term investors jumping in and jumping out according to the ongoing market trend. This forces the manager to always keep cash available for such moves thus hitting the returns of the fund. Thus, long term investors would bear the cost of such short term switches. Also,in today’s advisory business, we know that customers are taken for a ride by their agents. This exit load atleast tells them beforehand tht they need to have a slightly longer term perspective which the agent might have gladly overlooked.

  • Gurvinder chadha says:

    Look at commission structure those who increased load it is now 2-3% upfront now

  • Sandeep says:

    Ideally there should not be any exit loads. Why should fund managers set terms on the investors money ? SIPs will suffer, investors now have to track each monthly EMI with its exit load and use FIFO while reducing the corpus.

  • DJ says:

    Next step: SEBI will come out with a rule that exit load cannot be more than 1.23% (which they will hike to 1.78% after a year) and that the exit load period cannot be more than 381 days which they will hike to 588 days after a year. And, we will sing the praises of SEBI. Then, they will make a rule that exit load has to be mandatorily waived if funds are transferred within an AMC and we will all bow down to them in eternal gratitude… I will revisit this comment in a couple of years.

  • Phoenix says:

    Some of these funds have not even remotely performed upto index leave alone out-performance. When investors realize that are feeding good-for -nothing neophyte parasitic managers, these excuse bags penalize investors! This is like paying kidnap ransom. Can’t perform and expect to hold us prisoners ? ! ! I simply kick out these crooks.

  • Bekxy says:

    Hi Deepak
    The higher exit loads are a function of commission and upfront brokerages which have gone through the roofs. Apparently upfront has gone as high as 6-7% hence to recover these, the AMC needs to ensure investor stays for two to three yrs. Hence the higher loads.

    • Thanks Bekxy! Strangely they apply to the DIRECT parts of the schemes too – I wonder if MFs can have a different exit load for DIRECT?

    • Shyam says:

      Wrong! Upfront commission is the trail commission paid beforehand. Exit load does not floe to the agent in anyway. It needs to be put back into the fund’s corpus and inflates the returns slightly. The ELSS schemes have the highest upfronts of around 4-5% because the total trail is paid beforehand and the agent receives nothing else for the next three years. Since the agents prefer such upfront commissions to yearly ones, we see a deluge of close ended funds where the modus operandi is the same.

  • Noel says:

    This is clear – The best business is that of a mutual fund – start once and get cash flow even increased cash flow from clients who for some reasons call themselves investors.
    Enjoy the good life and avoid paying them back the promised gold pot by simply stating that the markets are down and the investment are done in real estate or other projects which have high gestation period and the bottom line being

  • Noel says:

    Well there is no bottom line here