Jittery MFs make exits costly

Jittery mutual funds are building firewalls around their debt assets to prevent poaching by competing products in the market. At least three fund houses have increased exit loads on debt schemes in the past week alone. As new instruments like non-convertible debentures (NCDs) populate the market, debt funds fear outflow, forcing them to look at ways to discourage redemption. The move may help the funds earn some fees, even if it fails to arrest outflows, say experts.

SBI Mutual Fund has revised the exit load structure of SBI Dynamic Bond Fund with effect from August 16. It has not only increased the load to 1 per cent from 0.25 per cent but also extended the applicability of this load to one year.

Earlier, exits beyond 90 days were load-free. UTI Bond Fund will now charge an exit load of 1.25 per cent for redemptions made within 180 days, against 1 per cent earlier. Edelweiss Gilt fund increased its redemption charges five-fold from 10 basis points to 50 basis points. Redemption will be free of charge only if done after 90 days, against seven days earlier.

As debt becomes dearer, options for investors in the debt market are increasing everyday, with new companies coming up with non-convertible debenture issues. Further, a number of infrastructure companies are expected to begin issuing tax-free bonds and 80CCF bonds in the second half of the year.

Fund houses fear investors may look to re-adjust their fixed-income portfolio in favour of these products, which come with additional sweeteners. Mutual funds have already faced heavy outflows in the equities segment due to uncertain market conditions, with over 333,000 investor accounts shut in July. Funds can do without a similar exodus in the debt segment, which has driven growth this year. This could have forced funds to take this step, say experts.

“While it is for the individual fund house to explain what exactly forced their move, it clearly looks like a survival strategy. They are expecting money to flow out, for whatever reason. So they are trying to use this (higher loads) as a deterrent. If at all money flows, they want to make some money out of it,” said Suresh Sadagopan of Ladder 7 Financial Advisories.

Fund houses, however, say they are keeping in mind the interest of investors. Srinivas Jain, chief marketing officer, SBI Mutual Fund, says: “We have done this to make sure that investors come for a longer period and don’t invest with a short-term investment strategy. In a volatile interest-rate scenario, with a short-term investment, investors may not make expected returns.”

Akshay Gupta, CEO, Peerless Mutual Fund, agrees. He says: “In a couple of debt schemes, fund houses have raised the exit load in a high-interest scenario. The objective is that investors should not treat these schemes like money market schemes, where they enter and exit. Fund houses want to make sure investors remain invested for a long term.