A number of mutual fund (MF) companies are gearing up to roll back recent hikes in exit load after capital market regulator Securities and Exchange Board of India (Sebi) said last week that they could not have different exit loads for different classes of investors under the same scheme.
An exit load is a fee collected at the time an investor withdraws money from a fund.
Level-playing field: Sebi’s rule will benefit retail investors as they would be treated on a par with institutional investors. Earlier, investors of over Rs5 crore did not pay any exit load, while big-ticket investors could bargain for lower exit loads. Small investors usually ended up paying the highest rates to exit a scheme. Abhijit Bhatlekar / Mint
At least four MF firms told Mint they were working on ways to protect the interest of institutional investors, most of whom did not pay exit loads earlier.
The MF houses are required in the next few days to announce a new structure with lower, uniform rates for all schemes.
Before Sebi’s latest rule, investors of over Rs5 crore did not have to pay any exit load, while big-ticket investors who invested less than Rs5 crore could bargain for lower exit loads. Small investors thus usually ended up paying the highest rates to exit a scheme.
Now, while some MF companies are looking to reduce the lock-in period, others are planning to reduce the percentage rates of exit loads.
An official at SBI Funds Management Pvt. Ltd, which manages Rs34,158 crore, said: “We have to roll back and make it equal for all. We will continue to focus on long-term assets and will try to prevent exits before three years. For this, we may not reduce the lock-in period.”
He added that some MF firms might also launch separate institutional plans to protect the interest of corporate entities and high networth individuals. “We are waiting for internal approvals and will come up with the new structure in a few days,” he said on condition of anonymity.
Following a Sebi ban on entry loads effective 1 August, many MF houses rushed to raise the span for which exit load became applicable to one-three years, from the earlier six months to one year. An entry load is initial charges collected by an MF company, which are not refundable
This expanded the scope of premature withdrawals, allowing MF companies to charge exit loads and offset losses from the ban on entry loads. Until now, these firms typically charged up to 1% exit load for retail investors for premature redemption.
“We had raised the period to three years on all our schemes. Now we are discussing ways to get in line with this latest Sebi directive,” said the chief executive officer (CEO) of a mid-sized fund house, who did not want to be named.
“We have two options: one is to charge the same load for everyone or reduce the load applicability to a lower period. We will take a decision in a couple of days,” he added.
Sebi’s new rule to have uniform exit loads will also likely upset MF houses’ cash flow calculations, as incentive structures for distributors are finalized after factoring in the load rates. In this case, they would have had used the new, higher exit rates to determine the incentives.
“The move is helpful for the retail investors. We are working on new exit load structures for various schemes and will inform all investors in the next few days,” said Nimesh Shah, managing director of ICICI Prudential Asset Management Ltd.
According to Dhirendra Kumar, CEO of Value Research India Private Ltd, a New Delhi-based MF tracking company, Sebi’s ruling will have three consequences. First, some fund houses will launch new schemes for institutional investors with higher minimum investments. Secondly, some companies will reduce the existing load structure. Thirdly, some companies may roll back the current lock-in period of three years.
“The move will act as a dampener for the large investors. Fund houses will have to strike a balance and work on ways to protect the interest of big-ticket investors,” he said.
But fund houses are caught between a rock and a hard place, say industry experts.
“If MFs reduce the exit load, all classes of investors would start churning (prematurely exiting) frequently. And, if they increase the exit load for institutional investors, their participation would go down,” said Rajeev Deep Bajaj, managing director of New Delhi-based fund distributor Bajaj Capital Ltd.
“Although this will give confidence to the retail investors as they would be treated on a par with institutional investors, fund houses will be under pressure,” he added.
According to industry lobby group Association of Mutual Funds in India, equity schemes contribute about 25% of the Rs6.97 trillion industry. According to Value Research, 30-40% of this comes from institutional investors.
“It is an advantage to the retail investors. We are in the process of rationalizing the existing exit load structure for all,” said Sundeep Sikka, CEO of Reliance Capital Asset Management Ltd, adding that since institutional participation in his firm’s equity-oriented schemes is not much, Sebi’s rule will likely not have a big impact.
An exit load is a fee collected at the time an investor withdraws money from a fund.
Level-playing field: Sebi’s rule will benefit retail investors as they would be treated on a par with institutional investors. Earlier, investors of over Rs5 crore did not pay any exit load, while big-ticket investors could bargain for lower exit loads. Small investors usually ended up paying the highest rates to exit a scheme. Abhijit Bhatlekar / Mint
At least four MF firms told Mint they were working on ways to protect the interest of institutional investors, most of whom did not pay exit loads earlier.
The MF houses are required in the next few days to announce a new structure with lower, uniform rates for all schemes.
Before Sebi’s latest rule, investors of over Rs5 crore did not have to pay any exit load, while big-ticket investors who invested less than Rs5 crore could bargain for lower exit loads. Small investors thus usually ended up paying the highest rates to exit a scheme.
Now, while some MF companies are looking to reduce the lock-in period, others are planning to reduce the percentage rates of exit loads.
An official at SBI Funds Management Pvt. Ltd, which manages Rs34,158 crore, said: “We have to roll back and make it equal for all. We will continue to focus on long-term assets and will try to prevent exits before three years. For this, we may not reduce the lock-in period.”
He added that some MF firms might also launch separate institutional plans to protect the interest of corporate entities and high networth individuals. “We are waiting for internal approvals and will come up with the new structure in a few days,” he said on condition of anonymity.
Following a Sebi ban on entry loads effective 1 August, many MF houses rushed to raise the span for which exit load became applicable to one-three years, from the earlier six months to one year. An entry load is initial charges collected by an MF company, which are not refundable
This expanded the scope of premature withdrawals, allowing MF companies to charge exit loads and offset losses from the ban on entry loads. Until now, these firms typically charged up to 1% exit load for retail investors for premature redemption.
“We had raised the period to three years on all our schemes. Now we are discussing ways to get in line with this latest Sebi directive,” said the chief executive officer (CEO) of a mid-sized fund house, who did not want to be named.
“We have two options: one is to charge the same load for everyone or reduce the load applicability to a lower period. We will take a decision in a couple of days,” he added.
Sebi’s new rule to have uniform exit loads will also likely upset MF houses’ cash flow calculations, as incentive structures for distributors are finalized after factoring in the load rates. In this case, they would have had used the new, higher exit rates to determine the incentives.
“The move is helpful for the retail investors. We are working on new exit load structures for various schemes and will inform all investors in the next few days,” said Nimesh Shah, managing director of ICICI Prudential Asset Management Ltd.
According to Dhirendra Kumar, CEO of Value Research India Private Ltd, a New Delhi-based MF tracking company, Sebi’s ruling will have three consequences. First, some fund houses will launch new schemes for institutional investors with higher minimum investments. Secondly, some companies will reduce the existing load structure. Thirdly, some companies may roll back the current lock-in period of three years.
“The move will act as a dampener for the large investors. Fund houses will have to strike a balance and work on ways to protect the interest of big-ticket investors,” he said.
But fund houses are caught between a rock and a hard place, say industry experts.
“If MFs reduce the exit load, all classes of investors would start churning (prematurely exiting) frequently. And, if they increase the exit load for institutional investors, their participation would go down,” said Rajeev Deep Bajaj, managing director of New Delhi-based fund distributor Bajaj Capital Ltd.
“Although this will give confidence to the retail investors as they would be treated on a par with institutional investors, fund houses will be under pressure,” he added.
According to industry lobby group Association of Mutual Funds in India, equity schemes contribute about 25% of the Rs6.97 trillion industry. According to Value Research, 30-40% of this comes from institutional investors.
“It is an advantage to the retail investors. We are in the process of rationalizing the existing exit load structure for all,” said Sundeep Sikka, CEO of Reliance Capital Asset Management Ltd, adding that since institutional participation in his firm’s equity-oriented schemes is not much, Sebi’s rule will likely not have a big impact.
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