Investors must be well aware of the charges involved while making an investment in mutual funds. Mutual fund investments require you to pay entry and exit load charges that are an important part of these type of investments.
What is Load in a Mutual Fund?
A ‘load’ is referred to the commission that is charged on the sale or purchase of a mutual fund. The load is utilised to pay the sales intermediary like the financial planner, broker or the investment advisor. The load is like a payment for the time and expertise that a sales intermediary has applied to choose the right fund for the investor.
Load Mutual Fund:
There are various types of mutual funds that comprise of loads such as sales load or commission on purchase of funds as well as funds that are sold before a specific period of time after purchase. Mutual funds that require you to pay a load on purchase are referred to as entry load, while funds that require you to pay a load upon sale are referred to as exit load.
Sometimes, an investor can lower the cost by negotiating with the broker to waive off the load. While looking for a suitable mutual fund for yourself, always remember to make a comparative of the objectives and risk of the mutual fund, along with internal fees and sales loads. Mutual funds that do not incur any load are known as no load mutual funds.
Types of Loads in Mutual Funds:
Entry Load: This is a charge or commission given by the investor at the time of the initial stage of investment purchase to the mutual fund company. The entry load is usually deducted from the investment amount, reducing the quantum of investment. An entry load is charged to cover the company’s distribution costs. Entry loads for different mutual funds vary from each other. In simple terms, investors would purchase a mutual fund at the net asset value (NAV) plus the entry load. In India, until 2009, an entry load of up to 2.25% of the value of the investment was charged. This has been banned negatively impacting the mutual fund industry.
Exit Load: Exit load in a mutual fund is a charge paid to intermediaries for selling mutual fund shares for investors before the fixed time period. The commission is a percentage of the share’s value that is being sold. The return earned on selling the investment is reduced as the exit load is charged from the NAV. Exit load is different for different schemes. The asset management company retains the exit load and is not considered to be the part of the scheme’s earnings.
Contingent Deferred Sales Charge or CDSC is another type of exit load, where investors are required to pay exit loads based on the investment term. If investment in the mutual fund scheme is for a long-term, there is a reduction in the exit load. However, if you want to make an early exit from the mutual fund investment, you are required to a pay a huge amount as exit load.
The idea of exit load is to discourage investors to make untimely exits from mutual funds.
Difference Between Load And No Load Mutual Funds
Load Mutual Fund: In case of a load mutual fund, an investor is charged on the purchase of shares along with the initial sales fee. This charge can be from 1% to 8% of the total amount they are investing. For example, if someone makes an investment of Rs.1,000 in a 2% load fund, they would be investing an amount of Rs.998 as the remaining Rs.2 would be deducted as commission by the mutual fund provider. There can be different type of load funds in the market. In a back-end load, the fee is charged when the mutual fund shares are redeemed whereas in a front-end load fund, the fee is charged in advance.
No-Load Mutual Fund: In case of a no-load mutual fund, investors can buy or redeem shares after a certain period of time without any sales charge or commission. However, banks or brokers may charge certain fee for redeeming a third-party mutual fund. Most no-load mutual funds levy certain charge if an investor redeems their shares early. Long-term investors need not worry if they invest in a no-load mutual fund.
Why Take Loads Into Consideration
Before making an investment, an investors must take into consideration the loads as it affects the returns on their investments in a significant way. However, the performance of a mutual fund should also be taken into consideration while doing so. This is because some good performing funds may have higher load charges but they also yield greater returns.
A no-load fund allows investors to enter into a scheme/fund at Net Asset Value (NAV) without any extra charges on purchase or sale of units. From a regulatory point of view, a mutual fund cannot raise the load beyond a certain limit as stated in the scheme document. Any modification in the loads will apply to the future investments and not the existing ones. The mutual funds are entitled to make amendments in their offer document in case there is change in load charges so that the new investors can be kept well informed. As per the guidelines of the Securities and Exchange Board of India, no entry load can be levied on applications received directly by asset management companies through the Internet or designated collection centres. The entry load should be waived if distributors, agents, or brokers are not involved.
GST rate of 18% applicable for all financial services effective July 1, 2017.