Sebi has issued a new circular to all mutual funds, barely a week after its rule banning entry loads came into effect. The capital market regulator has told mutual funds to charge exit loads uniformly to all investors. The move plugs any possibility of mutual funds compensating for the lack of entry loads by recovering expenses from retail investors, when they exit a scheme.
Exit loads are a charge levied when investors exit a scheme, typically before a certain period. This is to discourage frequent churn in schemes, as it may affect the scheme performance. But mutual funds have typically implemented this in the same manner as they did for entry loads, larger investors got away by paying a lesser exit load.
Sebi’s move to ban this differential treatment serves a few purposes. One, a large investor could have exited a scheme, much earlier than a retail investor, without paying the load. This will not be possible now. Two, the removal of entry loads may have resulted in exit loads being used to collect charges from investors. This may have again created the distortion in expenses that Sebi has been trying to plug over the past year or so. It banned mutual funds from charging entry loads, which were being used by mutual funds to pay agents for collecting funds. The agents have been asked to collect commissions directly from customers in the form of a fee.