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Thursday, August 20, 2009

SEBI wants MF exit load only for 1st year

Within weeks of shaking up the mutual fund industry by abolishing entry load in all schemes and moving to a uniform exit load regime, SEBI has given another jolt to the fund houses. In a late evening meeting on Tuesday, SEBI suggested fund houses to move to a regime of charging exit loads only for the first year of investments. Tuesday's meeting with SEBI chairman was attended by all the heads of fund houses, the chief of Association of Mutual Funds in India (AMFI), the MF industry trade body and some top SEBI officials from the mutual fund department.

After SEBI mandated that all entry loads should go and exit loads should be uniform across-the-board , fund houses had gone into a rejig mode with their finances so that they could compensate MF distributors. The change in the compensation structure was done with the assumption that exit loads could be there for perpetuity.

But ‘‘the recent SEBI suggestion on exit load has sent all those changes to the compensation structure for a toss,'' said a top official at a fund house. ‘‘Our capacity to pay to the distributors will reduce substantially,'' said the head of a local fund house.

MF industry officials said that limiting exit load to a year could lead to increased inclination among investors to move out of a scheme if the returns over one year are good. ‘‘It has the potential to lead to large-scale churning in the fund industry,'' said the official. Earlier, as part of the rejig exercise to change the compensation structure, a host of fund houses had increased exit load period. Now if SEBI's advice becomes a rule, all those will have to be reversed, industry players said.

However, as the CEO of a fund house pointed out that so far SEBI has not come out with any formal letter. ‘‘It’s still evolving. I believe a lot of things can happen before it is formally notified,'' said the fund house CEO.

USHERING IN NEW RULES

After SEBI mandated that all entry loads should go and exit loads should be uniform, fund houses had gone into a rejig mode to compensate MF distributors.

But ‘‘the recent SEBI suggestion on exit load has sent all those changes to the compensation structure for a toss,'' said a top official at a fund house.

MF industry officials said that limiting exit load to a year could lead to inclination among investors to move out of a scheme if the returns over one year are good.


source: ET

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