Funds modify exit load

Mutual funds are modifying their exit load structure even as a heated debate over entry load rages within the mutual fund industry. A concept paper by Sebi, last week, proposed doing away with entry load if investors buy mutual fund schemes directly from fund houses.

Reliance Mutual Fund, Birla Sunlife Mutual Fund and Franklin Templeton Mutual Fund have increased the exit load in as many as six of their equity schemes. Exit load is typically the 'desirable' kind of load, say fund watchers.

"In the case of equity funds, exit load is a desirable load since it acts as a deterrent to investors from treating the fund as a short term investment vehicle which may be detrimental to long term investors. Funds would typically slash it because they face market pressure," said Dhirendra Kumar, CEO of Value Research Online that tracks the mutual fund industry.

While fund houses like Birla Sunlife have started charging an exit load of 0.5 per cent on investments in some of their equity schemes up to Rs 5 crore if redeemed within 6 months, others like ICICI Prudential have slashed the exit load on three of its schemes, two of which are equity diversified schemes.

In all the cases, the schemes are open-ended. Since investors tend to use such schemes to play the market, which was at an all-time high level in July, the exit load was hiked.

"In most of the open-ended funds, we are not able to control the quality of money that flows in. Having a small entry load acts as psychological deterrent to investors," Raghavendra Nath, vice-president, marketing and strategy, Birla Sun life Mutual Fund, said.

Most fund houses have preferred to increase or decrease the load but others like JM Financial Mutual Fund have reduced the time frame on the exit load.

For instance, when the fund was first started, an exit load of 0.5 per cent would have to be paid if investment was redeemed within three months from the date of allotment. The fund house has now changed it to one month.

Funds are also using the exit load to fight the competition in the market. The market has seen a flurry of arbitrage schemes in recent times including SBI Arbitrage opportunities fund, Lotus India Arbitrage Fund and others.

"When we started the fund, three months was the ideal timeframe since within the cycle of three months the entire deployment and re-deployment cycle is churned. With other products coming into the market and investors also feeling that a one month period was better than a three month period for locking their funds , we decided to modify our load structure," said Biren Mehta, fund manager at JM Financial Mutual Fund.

While arbitrage funds as a product is tailored for volatile markets, the JM Arbitrage Advantage fund's corpus went up during the market downturn.

But Mehta attributed it purely to the change in the lock-in period or the exit load.

However, fund watchers feel that arbitrage funds are a different ballgame since these funds are favoured investment destinations for high networth individuals.

These are debt plus kind of products and thus institutions may take a view on the market and then invest in them. There is also a possibility that the exit loads were high when the funds first got launched, they said.