At the recently concluded unitholders meeting of PPFAS Mutual Fund, an investor asked the team why PPFAS Flexi Cap Fund charges 2% exit load, which is higher than the industry. Rajeev Thakkar, CIO, PPFAS Mutual Fund, replied that the scheme did not have any exit load when the fund was launched and investors moved in and out of the fund frequently, so they decided to put an exit load to protect the interest of long-term investors.
Launched in August 2013, Parag Parikh Flexi Cap Fund charges an exit load of 2.00 % if the investment is redeemed or switched on or before 365 days and 1 % if the investment is redeemed or switched after 365 days but on or before 730 days. No exit load is levied after 2 years. The fund has delivered 21.16% CAGR since inception as of October 25, 2021.
Very few funds in the industry charge an exit load of 2%. Similar to PPFAS, Quantum Long Term Equity Value Fund charges 2% exit load if units are redeemed on or before 365 days and 1% till 730 days. There is no exit load for redeeming/switching up to 10% of units on or before 730 days. The fund has clocked 13.92% CAGR since inception as of October 25, 2021. “We want investors to have a longer-term investment horizon when investing into this scheme and overall equities. We invest in companies with two-year view at least. We want investors and our investment horizon to be aligned. Even before SEBI made it compulsory the exit load charges was going back into the AUM of the fund towards the benefit of existing investors,” says Sorbh Gupta, Fund Manager, Quantum Mutual Fund.
Without an exit load, fund managers are at the mercy of large redemptions which impacts the fund performance as they have to sell their holdings to meet redemptions. “High exit loads are usually put to discourage investors from churning or leaving the fund early. The fund management team constructs their portfolio considering that investors will continue to hold for long term and if investors exit the fund in short duration they may exit at the cost of other existing investors. Hence, the exit load can help prevent this situation or get reinvested for the benefit of other investors who continue to hold the funds. One should only invest in equity funds if their time horizon is more than five years. Even in hybrid funds, you need to have a holding horizon of a minimum of one to two years. If the investment is planned properly no investor should be worried about exit load. Debt Funds can be used to take care of short-term needs and usually, there are no exit loads in certain categories of debt funds,” says Harshad Chetanwala of MyWealthGrow.
As per Securities and Exchange Board of India (SEBI) regulations, exit load charges collected from exiting investors are plowed back to the scheme. Fund houses are allowed to charge an extra 20 basis Total Expense Ratio (TER) in lieu of that. Before October 2012, exit load money was allowed to be used for sales and marketing activities.
Traditionally, most actively managed equity funds don’t levy any exit load for redeeming up to 10% of the initial units allotted for a period of new year. If more than 10% units are redeemed, an exit of 1% is charged. No exit load is charged after one year in most funds.
Recently, SEBI has introduced the concept of swing price NAV in debt funds to deter large investors from exiting funds in order to protect the interests of retail investors. Under swing pricing, the fund adjusts the scheme’s net asset value (NAV) up or down to effectively pass on transaction costs arising from investors moving in or out of the scheme.
To deter corporates from using liquid funds for a very short period, the industry levies a graded exit load for a period of up to seven days which ranges from 0.0070% for the first day to 0.0045% for the seventh day.
Fund categories that have zero exit load:
- Money Market
- Ultra Short Duration
- Low Duration
- Exchange Traded Funds
Actively managed equity funds with zero exit load:
- Quant Active
- Quant Large and Mid Cap
- Quant Focused
- Navi Large & Midcap
- Navi Equity Hybrid
- Navi Large Cap
Some fund houses do not restrain investors from moving out of their schemes. "In the industry, it is used more as a behavioral tool, so that investor does not churn. The assumption is that it gives stability to the portfolio. This is true to the traditional ways of managing money. We believe in a dynamic way of managing money where stock rotation is integral to portfolio management. Churning/rotation in the portfolio is based on the liquidity Analytics and risk appetite data. We don’t want to restrict customers because we ourselves believe in an unconstrained approach to managing money. Our belief is if customers are happy, they will not redeem, if the customer is unhappy, they will still pay the load and exit,” Sandeep Tandon, founder, quant Mutual Fund.
Fund houses use exit load to deter investors from redeeming within a short span of time. For instance, from April 2019 till December 2020, Credit Risk Funds category saw net outflows for 21 months in a row to the tune of Rs 56,317 crore. To deter panic redemptions, some funds in this category have hiked exit loads. Funds like Aditya BSL Credit Risk, Baroda Credit Risk, BOI AXA Credit Risk, SBI Credit Risk Fund are levying exit load in the range of 3 to 4% for redemptions before one year. However, up to 10-15% units can be redeemed without any exit load in some funds like Aditya BSL Credit Risk Fund. Exit load is not applicable for segregated portfolios.
Should investors take into account exit load while selecting funds? Bengaluru-based MFD Srikanth Matrubai says investors should select funds based on their investment objective and asset allocation. “Investments should be goal-based and also on the basis of asset allocation. If you have to exit a fund, exit load should not matter as long as the goal for which the investment is done is achieved. Everything should not be looked at from the angle of saving cost. Reaching your goals is what matters.
