Not just depending upon the government and the central bank to help them tide over the huge loss in the assets under management and thereby threaten operations, the mutual fund industry has steadily begun reworking on the load strategy to attract new investments and reduce redemptions.
The policy makers have been supporting the industry already. The Reserve Bank of India has also announced that the facility of the commercial banks lending to the mutual funds sector has been extended till March 2009. However, the players have been directed to take some bold and uncomfortable moves on their own, says a source close to the developments.
The move on the part of the fund houses, therefore, is to lower the entry load and increase the exit load. Loads are expenses that the investors have to pay when they enter and exit mutual fund schemes. These are discretionally used by the fund management to meet the asset management expenses and also attract investors.
Starting November 1, there have been several funds, not just the debt fund and fixed maturity plans that have witnessed a net outflow in excess of Rs 70,000 crore, but also equity funds that have been using this strategy. The tactic has unfolded this way ? there has been an outright increase in loads where the pressure has been more, in cases where it has been moderate, the limit to enjoy a load free entry or exit has been increased. Then there are slabs for various redemption periods.
UTI MF, just as an example, has changed the load structure of UTI Master Index Fund and UTI Nifty Index Fund effective since November 10. It has introduced an exit load of 1% for the investments of less than Rs 10 lakh and if it is redeemed on or before 180 days. And, for the investments of more than Rs 10 lakh, there would be an exit load of one per cent for the units redeemed before seven days.
Like UTI MF, the fund houses including ICICI Prudential Mutual Fund, JM Financial Mutual Fund, Tata Mutual Fund and other fund houses have also revised the load structure to check the redemption pressures.
Importantly, in the FMP area, ICICI Prudential Mutual Fund has increased the exit load on some of its fixed maturity plan (FMP) schemes for new investors from 2% per cent to as much as 5%. Regulations laid out by the Securities & Exchange Board of India state that fund houses cannot charge more than 6% of exit load for investors wanting to quit before maturity. And since many of the funds have a standard exit load of 2% or above, there is a lot of scope for the fund houses to raise the load.
All of this is happening in the light of the AUM of the MF industry was badly hit in October due to the US financial crisis leading to the domestic market meltdown. The AUM of the MF industry was shed by 18% or Rs 97,201 crore at Rs 52.9 lakh crore in the said month.
Damage control
• The Reserve Bank of India has also announced that the facility of the commercial banks lending to the mutual funds sector has been extended till March 2009
• The mutual fund players have been directed to take some bold and uncomfortable moves on their own
•The move on the part of the fund houses, therefore, is to lower the entry load and increase the exit load