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Various mutual funds have made it more expensive for investors to exit early from the in-vogue short-term bond schemes.
These funds have pushed the minimum investment period for charging exit loads in these schemes, to discourage investors from early redemptions. An exit load is a fee that MFs take from investors if they pull out within a stipulated period. In the past couple of weeks, five asset managers — IDBI Mutual, L&T Mutual, Morgan Stanley Investment Management, JPMorgan Asset Management and Principal Mutual — have extended this time frame. Many others are expected to follow, as this scheme category is seen to perform better than most other fixed income schemes, with the Reserve Bank of India (RBI) undoing some of its recent measures to tighten short-term liquidity.
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“Short-term bond funds are best poised to benefit from possible cuts in the MSF (marginal standing facility) in the coming months. Investors will benefit from higher rates if they hold on to these (short-term bond funds) for a longer period,” said Nandkumar Surti, managing director, JPMorgan Asset.
| A HEAVY LOAD TO BEAR |
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IDBI Short Term Bond Fund Now: 0.50% on redemptions within 2 months; planned: 0.50% on redemptions in 9 months; effective: Oct 14 L&T Short Term Opportunities Fund Previous: 0.25% on redemptions within 1 month; now: 0.25% on redemptions within 3 months; effective: Oct 8 Morgan Stanley Short Term Bond Fund |
Previous: 0.50% on redemptions in 3 months; now: 0.50% on redemptions in 3 months; effective: Oct 1
JPMorgan India Short Term Income Fund
Previous: 0.75% for redemptions in 3 months; now: 0.50% for redemptions in 6 months; effective: Oct 1
Principal Income Fund-Short Term
Previous: 0.50% for redemptions in 30 days; now: 0.50% for redemptions in 180 days; effective: Sep 30
RBI, earlier this week, cut MSF by 50 basis points to nine per cent. This was a partial unwinding of earlier liquidity tightening, which included an increase in MSF, initiated mid-July to curb the rupee’s volatility. While the measures did little to limit the rupee’s decline, they resulted in short-term rates firming up and liquidity getting squeezed. “Fund houses have learnt a lesson from the recent panic (starting mid-July) that resulted in some investors redeeming heavily. Now, funds want to discourage such redemptions and ensure the interests of existing investors in these schemes are protected,” said Akshay Gupta, chief executive officer, Peerless MF. Exit load proceeds are ploughed back into the fund’s net asset value.
Investors have moved into short-term bond funds in recent weeks because the cut in MSF could result in a decline in short-term paper yields. They are looking to benefit from capital appreciation on account of a likely fall in yields. Yields and bond prices move in opposite directions.
Distributors are pushing these schemes because fund houses are offering higher upfront commissions, as they are certain the money would stay with them for a longer period. MF advisors are also recommending short-term bond funds but some are against putting money into schemes with exit loads that are lifted in March.
“I would advise investors to put money in funds with a three-four month exit load because liquidity conditions will tighten in March, with advance tax and the end of the borrowing calendar,” said Sunil Jhaveri, chairman, MSJ Capital.
“Investors would end up losing almost everything of what they have gained over the next three months,” he said.
