Debt Funds to Penalise Investors For Early Exit

Move will force fixed plan investors to stay invested for a longer period, say fund houses

Investors in various fixed income schemes will be penalised for early redemptions from these products. Many mutual funds have increased exit loads a fee for premature money withdrawals on fixed income schemes, with uncertainty about interest rate outlook prompting investors to move in and out of these products in a shorter period. Fund houses are hoping this step would encourage investors to remain invested in them for a longer period. Many funds have raised exposure to securities with higher maturity. Higher exit load is the best deterrent for rapid exits and this will allow the fund manager to commit money, as there could be high volatility in rates in the interim, said a senior official with a private mutual fund, which raised exit loads, on condition of anonymity. UTI Bond Fund will charge exit load of 1.25% for redemptions within 180 days and 1% for withdrawals between 180 and 365 days. Earlier, the fund charged an exit load of 1%,if money was pulled out within 365 days. SBI Dynamic Bond Fund revised exit load to 1% for redemptions within 365 days against 0.25% for withdrawals within 90 days. ICICI Prudential Regular Saving fund extended the period for imposing exit load to 15 months from 12 months while retaining the fee at 2%.Edelweiss Gilt Fund, JM Short Term Fund, JP Morgan India Active Bond Fund and Tata Dynamic Bond Fund, among others, have also raised exit loads or extended the period for charging this fee since July. Many mutual fund distributors have been recommending bond funds to clients more as trading bets, as volatility in interest rates provide opportunities to make a quick buck. Investing in bond funds is about getting the entry or exit timing right. There is some demand for bond funds at this juncture, as it is steadier than many other fixed income products. So, fund houses are raising exit loads to avoid investors taking a short-term view, said Sunil Jhaveri, chairman, MSJ Capital, a mutual fund advisor. The average maturity of all dynamic bonds funds has increased to 2.09 years at the end of July 2011 from 1.24 years in March 2011,as fund managers are betting on a pause in rate increases by the Reserve Bank of India, according to mutual fund tracker Morning star India. With average maturities going up, it is crucial for mutual funds to get investors to stay invested for a correspondingly longer period. A hike in exit load will protect the interest of investors, who intend to stay for a longer period, said Raghavendra Nath, managing director, Ladderup Wealth Management. nishanth .vasudevan@timesgroup.com



Economic Times, New Delhi, 23-08-2011