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Mutual Funds

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.

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