Asset management companies are in a tight spot. The way investors are making a beeline exiting from funds in a rising market to book profits is hurting them. The only way to survive in these tough times is to woo investors for the long-term. Having sold the idea of long-term wealth creation through systematic investment plans (SIPs), AMCs are now deploying new ways to retain investors by introducing exit loads.
Take for instance the newly launched Reliance Small-Cap Fund; it levies a 2 per cent exit load on redemptions in the first year and 1 per cent for withdrawals made in the second year. Investors are being coerced to remain in this fund for the long-tern. Says Sunil Singhania, manager, Reliance small-cap fund; “We were clear that we wanted long-term investors in this fund and communicated accordingly.”
Another fund, ICICI Prudential Regular Savings Fund, an open-ended debt fund aimed at retail investors, is also charging 2 per cent exit load for any redemption before completion of one year. In an industry that thus far has been charging 1 per cent exit loads on redemption within a year of investment, this move indicates desperate measures to retain investors.
Likewise, Quantum Mutual Fund, the only fund house that depends entirely on direct sales and does not involve distributors for selling its funds charges an exit load for two years in its long-term equity fund. Investor are charged as high as 4 per cent charges on redemption within the first six months, 3 per cent when exiting between 6 months to 12 months, tapering to 1 per cent on exits between 18 to24 months. Says Jimmy Patel, chief executive officer, Quantum Mutual Fund; “Our load structure has been the same since inception. We redeploy the exit charges back into the fund to compensate existing investors.”
Some fund houses have kept a very steep exit load for redemptions within the first three months. These include Tata Index Nifty and Sensex funds and Birla Sun Life Commmodities Equity fund. But the belief that a higher charge will compel investors to remain in a fund is new and yet to be proven. Says an industry insider on conditions of anonymity; “It takes up to three days to encash the cheque, by when AMCs issue the units. Sometimes cheques bounce and if NAVs of the issued units fall, it lead to losses for fund houses.” To recover such losses, the exit load is kept steep in the first few months.
It’s not clear how other fund houses plan to use the exit loads. According to the Securities and Exchange Board of India (SEBI) regulations, up to 1 per cent of the exit load can be used by the fund company for its own sales expenses. Load charged over that will have to be re-invested into the assets of the fund so as to compensate other existing investors, who might incur losses because of early exit made by someone else.