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Impact of higher exit loads on FMP

There has been a lot of discussion over higher exit load on fixed maturity plans. When the investment is at risk then even a high load might not stop the outflow. Arnav Pandya tells more.

business Updated: Nov 24, 2008 21:22 IST

There has been a lot of discussion over higher exit load on fixed maturity plans (FMP). Now as mutual funds would be implementing this point, it is essential to understand the implication of such a move because it could impact the decision-making process and investment calculations of an individual. This also makes it important for an individual to weigh the consequences of the situation.

Nature of move
In the current situation there is an exit load for investors who want to opt out of the scheme before it matures. This means that if you want your money back before the scheme ends, then you will have to shell out the penalty.

This is usually a couple of percentage points and when the returns from the scheme are in double digits, it does not act as a deterrent for an investor. There have been large-scale withdrawals from FMP and most investors have gladly paid the required amounts and completed the exit process. This is because the exit load represents a small percentage of the overall returns being generated.

Change in percentage
If there is a change in the percentage of exit load, then there is likely to be an impact on the investor. He would lose a good percentage of the invested funds, impacting the viability of the entire investment.

For example if the exit load is raised from say 2 percent to 4-5 percent, the amount an individual will have to forgo to exit the investment would more than double. This impact will surely act as a deterrent from exiting an investment before maturity, unless it still proves to be beneficial for the investor.

Overall returns
The overall returns are also an important factor that will influence an investor’s behaviour in a particular situation.

For example, if the returns available are around 11 percent and there is a 2 percent exit load then most investors might be willing to pay the load because the net returns still works out to be quite high. On the other hand, in a changed situation, where returns are around 8 percent while the exit load is 5 percent, there is very little that remains in the hands of an investor. The other thing that influences the decision to exit a scheme is concern for safety of the amount invested.

If an individual feels that his investment is not safe, he would be willing to pay a higher amount of exit load to opt out of the scheme and recover the principal amount along with whatever little return on investment is available.