A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Is there an advantage to investing in funds with an exit load?
We consider a Balanced Fund, which aims to provide growth and capital appreciation on the equity side and income and stability on the debt side. This scheme still carries considerable risk, as the equity share could be as high as 60%. This is only recommended for investors with a healthy appetite for risk and a long-term time horizon.
The fund management team of such a scheme would ideally only want long-term investors who share their belief that they will remain invested for a long period, of at least 3 years. Thus the fund can impose an exit charge of 1% for all repayments made before 3 years. In that case, the fund does not directly affect liquidity, but discourages investors from exiting before a period of 3 years.
The advantage for the scheme would come from the fact that all investors are aligned to a longer time horizon. This would be a comforting factor for the fund manager, which would allow him to choose stocks with such a thought in mind. According to the fund manager, such a strategy would allow for better performance of the fund, as there would be no short-term investors and repayments that affect a long-term strategy.