To stymie the flow of investors exiting short-term income funds, mutual fund houses have resorted to either increasing the exit loads on these funds or increasing the maturity period or both.
While this is not an industry-wide trend say fund managers, it may soon pick up pace in anticipation of an interest rate fall. “There have been some instances where either the exit load has been increased or the tenure or both. But if you compare these with the live open-ended schemes in the industry then the answer is fractional,” said Mr Killol Pandya, Head — Fixed Income, Daiwa Asset Management.
No increase likely
According to data sourced from Valueresearchonline.com, 16 debt funds have increased the exit load or increased the period of the fund such that no exit load is charged at the time of redemption. Typically, funds do not charge any exit load in case of redemption after a holding period of one-year.
With inflation levels coming down and GDP growth slowing down, there is reason to believe that the RBI, which is set to announce its mid-quarter review policy this Friday, will not raise interest rates, say fund managers.
“There is a lot of new money coming into these funds as interest rates are expected to fall. Investors are in this scenario expected to stay on for longer in their respective schemes. Therefore, the increase in exit loads is to protect against sudden redemption from short-term investors that may happen,” said Mr. Mahhendra Kumar Jajoo, Executive Director, Chief Investment Officer — Fixed Income, Pramerica Asset Managers.
Disincentivising strategy
An increase only in the exit load is a business call, which is made by the fund house in case interest rates are expected to soften, explain fund analysts.
“The whole purpose of increasing in exit load is to disincentivise the investor from exiting the fund. So, as a reward for parting with his liquidity, the maturity of the scheme is increased which leads to higher yield for the investor,” said Mr Pandya
Whereas an increase in the tenure alone indicates that the fund house is perhaps uncomfortable with the volatility in the corpus. Volatility in the corpus is caused when investors rapidly exit or enter the scheme causing fluctuations in the cash levels. Thus, increase in tenure alone will ensure that investors with a short-term would exit the scheme leaving only the long-term investors locked in, said fund analysts.