Domestic fund houses have expressed reservations against making equity schemes free of exit load, fearing this will be suicidal for a struggling and unstable fund market. The fund houses said this would increase churning of portfolios and hurt existing investors.
The concerns surfaced after Bharti AXA Mutual fund last week reduced the exit load on its equity schemes to zero. The fund house, which made the move effective from September 1, said this would provide investors the comfort of exiting whenever they want due to the current volatility in the equity segment.
At present, fund houses charge an exit load of one per cent for a one-year investment.
| IN TROUBLE | |
| Month | Net inflow |
| April | -1,333 |
| May | 1,256 |
| June | -1,446 |
| July | -3,400 |
| August | 2,890 |
| Total | -7,613 |
| Source: Amfi (Rs crore) | |
At a time fund houses are losing business due to last year’s ban on entry load, industry players say zero exit load will worsen the situation.The first four months of the current financial year have seen a net outflow of Rs 7,613 crore compared with a net inflow of Rs 7,290 crore in the corresponding period last year. “No exit load will lead to an increase in inflow-outflow of funds and benefit only unscrupulous investors. Mutual fund schemes will become a trading arena for them. This will affect other investors who will start taking short-term calls on their investments,” said a chief executive officer (CEO) of a mid-sized fund house.
A majority of the CEOs Business Standard spoke to denied any possibility of following the no-exit-load strategy. They said exit load was a deterrent for investors to stick with their investments for at least a year. Serious investors, they added, would not come to equity funds if exit load was removed.
“The overall impact won’t be good for investors as well as the fund houses. The existing investors will be hit as the net asset value will become more volatile if new investors start taking trading calls,” said the CEO a top fund house.
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The executive director of an independent body which tracks the industry said, “The move to introduce zero exit load is an unfortunate and strange development when fund houses are hardly getting anything from their current business. It will invite speculators to equity funds.”
Mutual funds should not be taken as an opportunistic investment, said the CEO of another mid-size fund house. Rather, he added, it was an asset allocation tool for those with a long-term perspective. “I do not know what purpose will it serve,” he said.
Some small fund houses which have not reached a critical size in terms of equity assets are worried. They said bigger fund houses might not have any impact on their funds. “However, for a small fund house like ours, such a move from our peer may bring undue competition for attracting more funds,” said the CEO of a fund house which manages around Rs 100 crore.