In this age filled with a plethora of investment options, has taken the centre stage for all the exciting benefits and the return it offers. The popularity of this investment option can be credited to the fact that it comes in all shapes and sizes and offers flexibility to the investor. In our series of articles aimed at educating you about the functioning of Mutual Funds, let's go ahead and explore the term “Load” in used frequently in this market linked investment instrument.
What is a Mutual Fund?
It is a common fund administered by a registered AMC (Asset Management) company where investors come together and contribute into a common fund in individual capacity. The regulatory framework for operations of AMCs in India is overseen by SEBI (Securities and Exchange Board of India), a government agency headquartered in Mumbai.
The purpose of a Mutual Fund is to create a common pool where consolidated collections are invested by fund managers in market linked instruments such as shares, debentures and bonds in the public space. The most visible benefit of putting money here is that the overall risk is limited only to the extent of invested amount. Unlike investing directly into the market where the risk is high, a MF is quite secure since the money of the investors is professionally managed by experts.
Compared to conventional options such as Savings Account or Term Deposits, Mutual Funds guarantee a higher return owing to its exposure to the financial market. Staying invested for a longer term implies better exposure to market, thereby increasing the appreciation of the units held. For beginners, options such as SIP (Systematic Investment Plan) can be the right one to start with. Here, you invest a fixed amount every month into the fund over a fixed period instead of a lump sum. Based on the amount and performance of the fund, you will allotted a fixed number of units where each unit will carry a certain value known as NAV (Net Asset Value).
Also, the types of MFs available in India makes it a versatile and flexible option where one does not have to necessarily consider a lump sum amount. The “risk” factor can also be adjusted by way of choosing between avenues where you want the AMC to reinvest your money.
What is a Load?
While joining or exiting a Mutual Fund scheme, investors are charged a fee by the mutual fund house to compensate for the distribution costs. These charges are referred to as ‘load’. Depending on the time these fees are charged to the investor, loads are categorised into an ‘entry load’ and an ‘exit load’.
Entry load is levied when the investor joins or enters a scheme and most of the mutual fund companies in India charge around 2.25% of the investment as an entry load. However, as per a SEBI regulation issued in August 2009, mutual fund houses cannot charge an entry load on direct applications. Direct applications do not involve intermediaries like brokers, fund managers, agents, etc. but when an investor opts for a regular plan through an intermediary, he/she has to still pay the entry load. Online purchases from the MF’s website are also exempted from paying an entry load.
Similarly, the fee charged to the investor by the mutual fund firm when he/she exits the scheme or redeems the units of the scheme is known as the Exit load. This kind of charge is imposed on investors to discourage them from exiting the scheme. Most mutual fund houses charge exit load when investors exit the scheme before the completion of one year. Exit load can range from 1% to 5% of the investment depending on the mutual fund company.
How is an Exit Load calculated?
An investor is charged an exit load when he/she redeems the units which is calculated as a percentage of the Net Asset Value (NAV) prevailing during the sale period. For example, if an investor wishes to sell 500 units of a mutual fund scheme that he/she had bought 5 months ago, he/she will be charged 1% as an exit load for exiting before 1 year. Assuming that the NAV is Rs.100, the investor will get Rs.99 (Rs.100-Rs.1) per unit. Therefore, the total amount that he/she will receive is Rs.49,500 (500*99). This implies that the investor has paid Rs.500 as an exit load (Rs.1 per unit).
Exit loads are also applicable while investing through a Systematic Investment Plan (SIP).
It is a term used to denote a fund where an the AMC does not charge a commission on the invested amount. It implies the entire money provided by the investor is taken into account and reinvested by the fund manager. On the other hand if the fund has a Load, it means that a sales commission will be deducted upfront and the balance is taken into consideration. For example, let's say you’re purchasing Rs.10,000 worth of MFs under the No-Load option. Here, the entire amount is considered without any types of deduction.
Now, let's consider an example of a fund which charges load up front. If the load (commission) is 5% of the the value of the MF purchased, the AMC will deduct Rs.500 and take into account, only Rs.9,500 towards reinvestment. The reason for charging a load is to pay for sales intermediaries such as brokers and advisors.
Nearly all AMC’s charge a commission in form of a load either at the time of investment or in phases. This information will be communicated to you at the time of signing up. You can also read the fine print carefully to understand the commission/charges involved.
Some of the mutual fund houses in India who offer no load funds are - TATA Contra, Quantum Long Term Equity Fund, JM Nifty Plus, HDFC Index Sensex Plus, Edelweiss Diversified Growth Equity Fund, DWS Alpha Equity and DWS Investment Opportunity.
Benefits of a No Load Fund
- Offers better returns - An entry load of 2.25% may seem little but when the investment is for a long term, this sum gets compounded and over the years, the amount can be quite high.
- The entire amount is invested - When you opt for a no load fund, 100% of the amount is invested in various stocks which means that the investor can enjoy returns for the entire amount.
- No dependency on the broker - With a no load fund, the investor can carry out the market research by himself/herself and take independent decisions on which stocks to invest. The investor doesn’t have to rely on the investment decisions taken by the fund manager/broker/agent/distributor.
Cost-effective - Since a no load fund doesn’t have sales charges, distributor’s fee or any kind of commission, the cost-expense ratio is relatively lower than a fund with load.
GST rate of 18% applicable for all financial services effective July 1, 2017.