When should you exit a scheme?

The absence of an exit load gives liquidity to the scheme, but isn't a good enough reason to sell

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Is removing the exit load a good enough reason to enter a scheme? HSBC Mutual Fund certainly believes it is. The fund house has recently removed exit load on all its schemes -" a good move from the investors' perspective.

According to the fund house, which manages Rs 5,346 crore (as on December 2012), the move would help investors exit without incurring additional costs. Puneet Chaddha, chief executive officer (CEO), HSBC Global Asset Management, India, says, "We believe it is only fair that investors are allowed the facility of exiting an investment like mutual funds without incurring additional costs, especially if they have genuine requirements."

This move is a good one because it gives more liquidity to the scheme at zero cost. At present, the fund house charges one per cent as exit load for all equity schemes and monthly income plans for one year, 0.25 per cent for ultra-short-term bond funds for 15 days and for gilt schemes, it is 0.5 per cent for six months.

In terms of cost as well, there is significant saving. If you had invested Rs 1 lakh in an equity scheme and exited before one year with gains of Rs 10,000, the exit load would have been Rs 1,100 (one per cent of Rs 1.1 lakh). After this, there would be short-term capital gains tax of 15 per cent on the remaining Rs 8,900. The amount: Rs 1,335. So, the total payout would be Rs 2,435 or almost 25 per cent of the gains would be wiped out.

After scrapping of the exit load, you will have to only pay a short-term capital gains tax. This will be on the entire gain of Rs 10,000 or Rs 1,500. So, the saving is Rs 935 -" quite a significant gain. But if you hold on to the scheme for a full year, there would be no tax on the capital gains.

In case of debt, if you sell it in less than a year, the gains would be added to your income and taxed according to the income tax bracket. Also, there will be a long-term capital gains tax of 10 per cent without indexation and 20 per cent with indexation.

No wonder, industry experts believe that while the move is good, investors should not use it as a tool to enter and exit, as and when they wish to. "While not having to pay exit load does give some flexibility to investors, investors must look at past performance of the fund, their own investments and only then decide if they want to sell or not. If all other factors like returns and fund performance are equal, then maybe they can look at exit load. Not otherwise," says Hemant Rustagi, CEO of Wiseinvest Advisors.

Rajesh Krishnamoorthy, managing director, iFast Financial, says during bull runs, many investors might use such opportunities, as they would have gained much more than expectations. "But only investors who have a specific timeframe will look at the exit load. From the long-term investment point of view people will not look at exit loads, as the investment objective is beyond what could be the exit load period," he adds.

But for those who will stay on and not use such opportunities to exit, the net asset value will improve as the market regulator, Securities and Exchange Board of India, has mandated that exit loads should go back into the scheme. Of course, existing investors in HSBC mutual fund will not get that benefit as there are no loads anymore.