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Mutual Fund Exit load is good for Long Term Investors
Retail investors in mutual fund schemes, in a good market, are often misled to churn their portfolio aggressively, say industry players. Obviously, they are seldom able to reap benefits of stay invested for the long term. From that perspective, the decision of a number of fund houses to increase exit loads from October seems like a good idea. Fund houses such as, Axis Mutual Fund, UTI Mutual Fund, HDFC Mutual Fund, Reliance, Birla Sun Life and others have increased exit loads for select schemes from 0.5 per cent to two per cent for tenures ranging from one to three years. Some have even doubled it.
From the perspective of financial prudence, it is good that there is a deterrent for exiting in the short term. This will also reduce mis-selling as there is a cost involved for exiting which investors will not appreciate. The tenure for exit loads should be increased to five years or even more because it will force investors to stick around with a particular scheme.
Though the exit load still isn't too high, it will act as a deterrent.
Two, if investors stay in the scheme for some extra time, it will only be good. The best part: If you are invested through a systematic investment plan, each instalment will have to complete the prescribed tenure, otherwise it will attract the load –much like SIPs for equity linked savings schemes ( tax saving) in which each instalment has to be complete over three years otherwise it will attract capital gains tax.
While retail investors have turned positive and putting money in mutual funds for the past few months, they were busy closing their folios during the early part of the year. Fund houses have lost 10- 15 million folios since March 2009 due to bad market conditions and some profit booking.
With the latest move, financial sector players feel, fund houses are trying to ensure that investors stick around for some more time. Most fund houses have also launched at least 25 closed- end schemes in the past year to get investors for the longer term. This is a good thing from the fund manager and distributors' perspective as well because it reduces churning. The fund manager can take longer term calls and improve performance of the scheme.
However, investors need to consider an important thing. While having an exit load is good for financial prudence, for certain kind of schemes it may become an obstacle. For example, locking in an investor in a large or well- diversified scheme is a good idea because they are cycle- agnostic. But if the same exit load is applied for a sector fund or even a mid or small- cap scheme, it could actually not be of help to the investor. Ideally, investors in sector or mid or small- cap funds should be given the flexibility to exit without any load after one year. This is because sector funds are typically used to provide a fillip to the portfolio. But many of are cyclical and perform in spurts during certain periods
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