Wednesday, July 7, 2010

Exit load likely on early redemption in liquid plus plans from August 1

Indian fund houses plan to charge a fee, known as exit load, for early redemption of investments in the popular liquid plus schemes of mutual funds, starting August 1, which may prompt institutional investors such as banks and corporates to switch a part of their surplus money to other short-term debt schemes.

Mutual funds may impose an exit load of 0.1-0.5% for early redemption in liquid plus schemes, which constitute about 35% of the mutual fund industry’s total assets under management (AUM) of Rs 6.76 lakh crore, according to officials in fund houses and mutual fund distributors. The bulk of the investments in such schemes are in money market and debt securities with a maturity of over 91 days.

Fund houses intend to charge this fee to smoothen flows into such schemes and reduce volatility in returns as a new norm to value debt securities with maturities of over 91 days kicks in on August 1. Mutual funds fear that the new valuation rules could increase uncertainty in returns from this product, thereby reducing their popularity among investors.

The period for which this fee or exit load would be charged would depend on the tenure of the scheme. “Liquid plus schemes can go negative on a day-to-day basis if average maturity profiles are longer and the mark-to-market (MTM) portion is higher,” said Sunil Jhaveri, chairman, MSJ Capital and Corporate Services, a New Delhi-based mutual fund advisor.

Liquid plus schemes with an average maturity of 100-110 days could have exit loads between 7-15 days while the more aggressive liquid plus products with an average maturity of 120-140 days are likely to have exit loads between 15-30 days, according to Jhaveri and mutual fund industry officials.

“By imposing exit loads depending on the average maturity, we are telling investors give us at least this time to give you reasonable returns,” said a senior official with a leading private mutual fund. “If there is volatility in the corpus, it will be difficult for us to manage the scheme,” he said, requesting anonymity.

The imposition of exit load after August 1 could lead to some investors shifting money from liquid plus to liquid schemes. Liquid funds, which invest in debt instruments with maturity below 91 days, do not have exit loads.

Fund officials said some mutual funds that had introduced this fee on early liquid plus redemptions a couple of years ago were forced to withdraw it because of protests from investors.

This time, the fee may stay as industry officials and distributors do not expect investors to throng to liquid schemes because liquid plus schemes fetch better returns and are taxed lower.

A DDT of 28.33% is charged on liquid funds while it is 22% for other debt schemes, including liquid plus schemes. Liquid plus schemes are likely to return 4-4.25% annualised in August because of their investments in securities of longer maturity.

Returns from liquid schemes are expected to be 3.50-3.75% when the liquidity improves next month. “Investors have few alternatives... Many of them would be forced to stick to liquid plus,” said. Not all asset management firms are likely to impose these exit loads.

“We are not likely to impose any exit load on our liquid plus scheme. Instead, we would advice investors to put money in our short-term fund (of maturity 6-15 months), which has a 15-day lock-in, that is of minimal risk,” said Nandkumar Surti, chief investment officer, JPMorgan Asset Management.


IDBI MF Launches IDBI Liquid Fund

IDBI Mutual Fund has launched a new fund named as IDBI Liquid Fund, an open ended liquid scheme. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for subscription from 7 July and closes on 8 July 2010.

The investment objective of the scheme will be to provide investors with high level of liquidity along with regular income for their investment. The scheme will endeavour to achieve this objective through an allocation of the investment corpus in a low risk portfolio of money market and debt instruments.

The scheme offers two options viz. growth and dividend option. The dividend option has three sub-options (frequency of dividend declaration) - daily dividend (compulsory reinvestment), weekly dividend and monthly dividend.

The scheme would allocate 50% to 100% of assets in money market instruments with maturity / residual maturity upto 91 days. It would further allocate upto 50% of assets in debt instruments (including floating rate debt instruments and securitized debt) with maturity / residual maturity / interest rate resets upto 91 days. Investment in securitized debt would not exceed 50% of the net assets of the scheme.

The minimum application amount is Rs 5000 and in multiples of Rs 100 thereafter.

The fund seeks to collect a minimum subscription (minimum target) amount of Rs 10 crore under the scheme during the NFO period.

Entry and exit load charge will be nil for the scheme.

Benchmark Index for the scheme is CRISIL Liquid Fund Index.

The fund manager of the scheme will be Mr. Gautam Kaul.

Source: http://www.indiainfoline.com/Markets/News/IDBI-MF-Launches-IDBI-Liquid-Fund/3162097092

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