Mumbai: Markets regulator Securities and Exchange Board of India, or Sebi, on Tuesday asked mutual funds to reduce the lock-in period, or the time before which investors will have to pay a penalty for exiting a scheme, from three years to one year.
In a meeting with the chief executive officers of fund houses on Tuesday, the regulator raised its concern over a recent move by fund houses to increase the lock-in period beyond one year.
The fund houses had increased the lock-in period following a Sebi directive to scrap entry loads (a purchase fee) for mutual fund investments from 1 August. The regulator had also capped the portion of exit load that could be used for asset management expenses at 1%.
Investment concerns: The Sebi headquarters in Mumbai. Abhijit Bhatlekar / Mint
Some fund houses, faced with the loss of income from the entry load, had increased the applicability of exit load fees to three years instead of the earlier 6-12 months, raising the cost of exiting a scheme.
However, the move was seen by the regulator as being unfair to retail investors since the exit load was not applicable for investors who put in at least Rs5 crore, as per Sebi norms. Investors with large amounts but less than Rs5 crore could bargain for a lower exit load, thus laying the maximum burden on small investors.
Following this move, the regulator directed fund houses to bring parity in exit loads for all classes of investors, irrespective of the plans and the amount of investment.
“The regulator wanted the mutual funds to reverse their recent move to increase exit loads as it defeats the purpose of recent regulator moves to make investments easier for retail investors. So funds are likely to bring down the exit-load applicability to one year,” said the chief executive officer of a domestic fund house, who did not want to be identified.