Entry load and exit load in Mutual fund
A Load Fund charges a percentage of NAV for entry or exit
It can be referred to as the commission to AMCs or the exit penalty
Before talking about entry load and exit load in Mutual funds, it is required to know what this load is. Mutual funds are known for a higher return with low risk and are the best deal for the long run. It is primarily because a team of sales intermediaries like a financial planner, broker, or the investment advisor manages the fund and generate returns. Trained fund managers plan investments, which diversifies the overall portfolio on your behalf. But everything comes at a cost. So, as an investor, you have to pay the fee for the service you receive. This fee is known as ‘load.’ It is integral charges linked with mutual fund investments.
The asset management companies (AMCs) charge this particular sum or load from the investors to cover their distribution expenses, administrative costs, operational costs, and other transactional charges. Whenever you buy a mutual fund or exit from a scheme, mutual fund companies collect this amount from you.
What is a load or no-load fund?
A Load Fund charges a percentage of NAV for entry or exit and the load structure of a scheme has to be disclosed in its offer documents. A no-load fund doesn’t charge for entry or exit. It means the investors can enter the scheme at NAV and there are no additional charges on purchase or sale of units.
What are the types of load?
This load is primarily of two types, the entry load and the exit load. The amount or fee charged from an investor while entering a scheme or joining the company as an investor is called Entry Load. On the other hand, the exit load is a fee or an amount charged from an investor when he exits or leaves a scheme or the company as an investor.
What is Entry Load?
Entry Load is a percentage levied on the purchase of a mutual fund scheme that is deducted from the amount invested by the investor into the scheme reducing the quantum of investment. In another way, it can be said that investors purchase a mutual fund scheme at the net asset value (NAV) of the scheme plus the entry load.
An entry load is collected to cover the distribution costs of the company. It varies as per different mutual funds houses. In India, usually, this charge was around 2.25% of the value of the investment.
However, from August 2009, SEBI has mandated that no entry load can be charged in India for any mutual fund scheme to give relief to the investors. This step has not only affected the distributors in the mutual fund industry severely but also affected the mutual fund industry as a whole.
What is Exit Load?
The mutual fund houses collect exit load at the time investors exit the scheme, or they redeem units of a fund before the stipulated period. It can be referred to as the commission to AMCs or the exit penalty, which is charged when an investor exits the fund in the lock-in period. Usually, it is a percentage of the Net Asset Value (NAV) of the mutual fund units held by investors. After the AMC deducts the exit load from the total NAV, the remaining amount gets credited to the investor’s account. The investor, who completes the agreed fund tenure, will not be charged the exit load at the time of redemption.
Sometimes investors fail to stay invested for the period for which they had agreed. Exit load mainly applies to discourage investors from prematurely exiting the scheme. Leaving the scheme by the investor means a reduction in the amount of funds of the scheme of mutual funds. This fee may help reduce the number of withdrawals from the mutual fund schemes.
In India, different mutual funds houses charge different exit loads, and currently, the exit load charged is credited to the scheme. However, not all funds levy an exit load. In a no-load mutual fund, investors can buy or redeem shares after a certain time without any sales charge or commission. Still, most no-load mutual funds levy a particular charge if an investor redeems units early. And in case of open-ended funds, the investors may choose to exit the scheme as and when they want.
There is another type of exit load called Contingent Deferred Sales Charge or CDSC. This exit load depends on the term of the investment. If the investment is for a long-term, lower is the exit load. However, if the investor wants to make an early exit from the mutual fund investment, the exit load charged is substantially high and vice versa.
Why consider load before investing?
Investors must consider the loads as it affects the returns on their investments in a significant way.
For instance, if the exit charges for a one-year scheme is 2% and the NAV of the fund is Rs.35 during the time of redemption. If you redeem within six months, then the exit fee 2% of Rs.35 or Rs.0.7 will be deducted and the remaining Rs.34.30 gets credited to the investor.
From a regulatory point of view, mutual funds cannot increase the exit load beyond the level stated in the offer document. If there will be any modification in the loads, it will apply to future investments and not the existing investments. The mutual funds are allowed to make amendments regarding the change in loads in their offer document to keep the new investors well informed.
Difference between an entry and exit load
At present mutual funds do not charge an entry load while the exit load differs. The significant difference between them is that one is charged at the time of entry or buying a mutual fund scheme, while the other is charged at the time of selling a mutual fund scheme.
To conclude, while considering loads before investing, the investors should also consider the performance of a mutual fund and service standards because some good performing funds may have a higher load, but they also yield greater returns.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh