Indian fund houses
plan to charge a fee, known as exit load, for early redemption of
investments in the popular liquid plus schemes of mutual funds, starting
August 1, which may prompt institutional investors such as banks and
corporates to switch a part of their surplus money to other short-term
debt schemes.
Mutual funds may impose an exit load of 0.1-0.5% for early
redemption in liquid plus schemes, which constitute about 35% of the
mutual fund industry’s total assets under management (AUM) of Rs 6.76
lakh crore, according to officials in fund houses and mutual fund
distributors. The bulk of the investments in such schemes are in money
market and debt securities with a maturity of over 91 days.
Fund houses intend to charge this fee to smoothen flows into
such schemes and reduce volatility in returns as a new norm to value
debt securities with maturities of over 91 days kicks in on August 1.
Mutual funds fear that the new valuation rules could increase
uncertainty in returns from this product, thereby reducing their
popularity among investors.
The period for which this fee or exit load would be charged
would depend on the tenure of the scheme. “Liquid plus schemes can go
negative on a day-to-day basis if average maturity profiles are longer
and the mark-to-market (MTM) portion is higher,” said Sunil Jhaveri,
chairman, MSJ Capital and Corporate Services, a New Delhi-based mutual
fund advisor.
Liquid plus schemes with an average maturity of 100-110 days
could have exit loads between 7-15 days while the more aggressive liquid
plus products with an average maturity of 120-140 days are likely to
have exit loads between 15-30 days, according to Jhaveri and mutual fund
industry officials.
“By imposing exit loads depending on the average maturity, we
are telling investors give us at least this time to give you reasonable
returns,” said a senior official with a leading private mutual fund. “If
there is volatility in the corpus, it will be difficult for us to
manage the scheme,” he said, requesting anonymity.
The imposition of exit load after August 1 could lead to some
investors shifting money from liquid plus to liquid schemes. Liquid
funds, which invest in debt instruments with maturity below 91 days, do
not have exit loads.
Fund officials said some mutual funds that had introduced this
fee on early liquid plus redemptions a couple of years ago were forced
to withdraw it because of protests from investors.
This time, the fee may stay as industry officials and
distributors do not expect investors to throng to liquid schemes because
liquid plus schemes fetch better returns and are taxed lower.
A DDT of 28.33% is charged on liquid funds while it is 22% for
other debt schemes, including liquid plus schemes. Liquid plus schemes
are likely to return 4-4.25% annualized in August because of their
investments in securities of longer maturity.
Returns from liquid schemes are expected to be 3.50-3.75% when
the liquidity improves next month. “Investors have few alternatives...
Many of them would be forced to stick to liquid plus,” said. Not all
asset management firms are likely to impose these exit loads.
“We are not likely to impose any exit load on our liquid plus
scheme. Instead, we would advice investors to put money in our
short-term fund (of maturity 6-15 months), which has a 15-day lock-in,
that is of minimal risk,” said Nandkumar Surti, chief investment
officer, JPMorgan Asset Management.
