The Securities and Exchange Board of India (SEBI) has directed mutual funds (MFs) to have a uniform exit load — a fee charged for early redemptions — for investments through the lumpsum route as well as systematic investment plans (SIPs). The securities market regulator communicated this to mutual funds in a briefly-worded letter without providing any reason, according to two officials at two different fund houses.
“We usually waive off the exit load for large investors, who invest a lumpsum, as the situation demands. In the case of SIP, we charge an exit load as per the period mentioned in the prospectus,” said a top official at a private mutual fund.
Prospectus of asset management companies (AMCs) says an exit load of 1% will be charged in case the investments are redeemed before a year. Most AMCs do not charge exit loads for investments over Rs 3-5 crore.
“It is the retail investors who usually tap the SIP route and a load on early exits is a deterrent against redeeming money before they can start showing returns,” the mutual fund official quoted above said. “Also, it’s a structure that suits the business,” he said.
This directive, among its various recent decisions, is seen as SEBI’s attempts to push mutual funds to shift their business focus on servicing more retail investors, drawing hushed protests from the industry.
“SEBI is getting into micro-management of the industry nowadays. It is getting all the more difficult to run the business,” said a senior official with another private mutual fund.
Last week, the market regulator reiterated its concerns over mutual funds charging higher expense fees in schemes meant for retail investors compared to the same product for institutions. Mutual funds offer two versions or plans — institutional and retail — of the same scheme. Higher expense fees could result in the institutional plan of a scheme fetching slightly higher returns than the retail version of the same scheme.
SEBI chairman CB Bhave, at a recent industry body forum, criticised the business practices of the mutual fund industry and reiterated the need for them to focus on investors to grow.
Mutual funds have been struggling to attract money into their equity schemes since August 2009, when SEBI banned mutual funds from charging investors to pay fees to distributors. Following this move, distributors are selling fewer mutual fund schemes.