Debt mutual funds see introduction of exit loads

MUMBAI: Several fund houses have introduced exit loads on fixed income mutual fund schemes in April 2012. Fund houses such as SBI, Canara Robeco, Taurus, JP Morgan, Principal have introduced or increased exit loads on early exits by investors.

"Funds want to deter the short term investors given the high costs involved in portfolio turnover in fixed income market, given high buy-sell spreads," says Vikram Dalal, managing director, Synergee Capital.

The debt mutual fund schemes have been doing well for some time now. According to Value Research, an online tracking entity, short term debt funds delivered 2.27% and income funds delivered 2.01% returns in the last three months.

The exit load would discourage very short term investments in these schemes as it brings down the net gain to investors.

"In case of large sums moving out of the fund in a very short period of time, fund manager has to sell liquid investments such as bank CDs, as privately placed bonds in most cases do not have an efficient secondary market. In most cases the bid ask spreads being too high," says a fund manager with an Indian mutual fund.

Frequent churning of portfolio pushes expenses of the schemes upwards. This in turn brings down the performance of the scheme.

Exit loads introduced are in the range of 0.15% to 0.5% and are for redemptions before completing 15 days to 180 days depending on scheme.

An income fund may charge exit load for redemptions up to 180 days from the date of allotment of units, whereas a short term bond fund, may charge exit load for redemption up to 90 days from the date of allotment.