Wednesday, May 16, 2012

Exiting A Mutual Fund Within 1 Year Without Paying Exit Load

We all know that, as investors we can exit a Mutual Fund anytime we want. However, if we are exiting an investment within a minimum investment period (Usually 1 year) an exit load (Usually 1%) is applicable and payable by the Investor. But, did you know that there are certain exceptional circumstances where an investor can exit a Mutual Fund without paying this Exit Load even if redeeming within the mandatory hold period? This article is about that...

When Can an Investor Exit a Fund without Exit Load?

Mutual fund investors have the option of exiting their investments if there are changes in the fundamental attributes of the scheme. Some of the changes that can trigger such an exit are:

1. A change in the controlling interest of the AMC or
2. An AMC buy-out by another AMC
3. Change in the investment objectives or asset allocation pattern of the scheme,
4. An alteration in the fees, expenses or
5. Anything that can affect the interest of unit holders.

Such changes require prior approval of SEBI. Most importantly, the fund house has to inform the investor in case of such alterations in writing.

In such a situation, the Investor can opt to exit the fund without paying an exit load if he/she is not satisfied with any of the changes outlined above.

Communication from the AMC:

The mutual fund AMC is required to send an individual communication to all investors in the scheme, giving details of the proposed change and the rationale for it. It must also mention the period within which the investors can exercise the exit option.

A Real Life Example:
Recently L & T Finance finalized a deal on buying out Fidelity Mutual Funds. This deal is subject to all regulatory approvals which are in progress, but once the approval is received, Fidelity MF will be owned by L&T Finance and they can choose to rename it as well. Here, the Fidelity AMC is being purchased by another company - L&T. So, in this case, all investors of MF Schemes run by Fidelity Mutual Funds will get a notification and be given an option to either continue their investments or exit.

How an Investor Proceeds with the Redemption Request?

Investors need to fill up a standard redemption form and submit it at the AMC office within the specified period. The units are redeemed at the NAV for the day on which the redemption request is made just like any regular redemption request.

An important point to note here is that, any Systematic Investment Plans that might be active will be automatically closed when you choose to exit.

What Happens if an Investor does not choose to Exit?

If an investor does not exercise the exit option within the stipulated time period as outlined in the communication, he/she is said to have consented to the change and automatically continues with his/her investment with the altered/modified scheme.

Any redemption request after that timeframe will be charged the exit load if applicable.

Is this applicable to all MF Schemes?

No. Equity Linked Savings Schemes (ELSS) also called Tax Saving Schemes are an exemption to this rule. If such a change happens during your mandatory 3 year lock-in period, you will not be able to exit the fund investment. If your investment has crossed the 3 year lock-in period, then you can exit.

Happy Investing in Mutual Funds!!!

1 comment:

  1. As a financial planner, I totally understand where you're coming from.
    I read your site fairly often and I enjoy your posts.

    I shared this on twitter and my followers enjoyed it too.
    Kepp up the good work!


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