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SEBI move to aid small players
August, 10th 2009

The latest SEBI move towards a uniform exit load for fund houses will stop the practice of small investors subsidising the bigger ones in the same scheme. This could also help, to some extent, deter those fund houses which practiced the money for AUM concept, wherein they used money power to increase their assets under management (AUM), although a major chunk of this AUM came from corporates and was mostly aimed at short-term gains, industry players said.

The practice of differential exit load worked this way: Fund houses are allowed to charge some money from innvestors when they exit a scheme. Under SEBI rules this charge, called exit load, could be up to 7% of the value of the investment, but most fund houses limit it to 2.5%. The catch, however, is elsewhere. Several fund houses have graded exit loads in most of their schemes where higher the total investment by an investor or a corporate, lower the load.

For example, someone with Rs 1 lakh in an MF scheme will be charged 2% exit load, that is Rs 2,000, if he wants to redeem his investments . But a corporate house that has Rs 5 crore in the same scheme will not be charged anything if it decides to redeem. In both cases the fund house will incur some costs, in the form of fund management, administrative and others expenses, and is also allowed to charge up to 1% exit load as marketing expenses for the scheme. In the above example, while the small investor pays Rs 2,000 to exit the scheme, the corporate walks away for free.

Now if 100 small investors, each with Rs 1 lakh invested in the scheme, prefer to exit in the short run, along with one large investor, the fund house will collect an aggregate of Rs 2 lakh, but this only from small investors and nothing from the large one. In effect the smaller players subsidise the big investors.

On Friday, SEBI said that henceforth fund houses will not be allowed to differentiate among different types of investors and all should be charged exit loads uniformly . The discrimination has ended, said Vijay T Gokhale, an investor activist who claimed to have petitioned SEBI to do away with differential load structure.

It was a complete anti-thesis of the very concept of mutual funds, which should be more tuned towards small investors , said the head of a domestic fund house. Big investors can always pay a little more money and have private managers for their funds.

The concept of differential exit loads had made a large part of the Indian MFs more like a corporate treasury that was being subsidised by small investors. Often some fund houses went after big corporates , induced them to put surplus cash into their schemes with no loads for large sums while loads existed for small investors. The differential exit loads were not applicable for long term investments.

If one combined this decision with SEBIs recent decision of no entry load to customers , the message from the regulator is clear: It is the job of intermediaries (MF distributors and financial advisors ) to bring in funds, while fund houses should concentrate on managing money without discriminating between investors, an industry veteran said.

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