What is a load in mutual funds?
The load is a charge or commission levied by a mutual fund company on an investor while buying and selling units. This charge is collected in order to pay for services like brokerage charges, transaction costs, etc.
The load on various mutual funds can are different according to the respective funds. There are different types of load which include the following:-
- Entry Load
- Exit Load
- Zero Load
- Contingent Deferred sales charge (CDSC)
1. What is an entry load in mutual funds?
Entry load is levied when an investor purchases the units. It is charged as a commission and the rest of the amount is invested in the fund.
For Eg:- If an investor wants to invest ₹1000 & if the entry load on the same is 5% then the total amount invested in the fund is ₹950.
Entry load in mutual fund abolished.
The entry load was abolished by SEBI on August 1, 2009.
This was done to lower the investment cost in mutual funds & also to bring transparency to the system. Before this step was taken, a broker would have may advise this client to go in & out of the fund for this personal benefit.
When the proposal was announced in June 2009, C.B. Bhave, chairman, Sebi said,
“Now, mutual fund investors will be deciding how much commission they want to pay and will be paying it directly to distributors. This will hugely empower mutual fund investors and force distributors to stay competent to justify their role. In an investor-dominated market, the competition will ensure a lower rate of commission and high quality of service”
Despite opposition from almost all distributors, Sebi went ahead with the reform, saying that “it is the result of a process and not as per anybody’s likes or dislikes”
Now if a broker or a financial advisor wants to charge a commission to the investor he should disclose it and charge it separately.
To learn more about the abolishment of entry load go here: Businesstoday.in
2. What is an exit load in Mutual funds?
Exit load is charged when an investor sells his mutual fund units before a predefined time. For example, if an investor withdraws his money before one your general a mutual fund company charges a 1% exit load to discourage investors from doing short-term investment.
This article discusses in great detail exit load.
3. What is a no-load mutual fund?
Under the no-load mutual fund, investors do not have to pay any commission or charges while investing the same. The no-load include both the side of the buying & selling of mutual fund units.
A no-load fund reduces the total cost of investment in a mutual fund. So an investor is better off buying funds that do not have any load on them, as the load may not enhance the value provided by the fund.
Most of the mutual funds units are available to invest without any load.
4. Difference between no load, exit load & entry load
In a no-load fund, an investor is not required to pay any commission or charge, whereas in the case of exit load an investor only needs to pay only if he/she sells the unit before the specified period. But all investors need to pay entry load while buying the units.
Exit load is generally charged as 1% if the amount is withdrawn before one year period. Exit load may vary from fund to fund. Entry load is not allowed to be charged by mutual funds company since August 2009.
5. What is a contingent deferred sales charge (CDSC)?
The contingent deferred sales charge is a type of exit load which is levied when an investor sells this unit before the prescribed period. The CDSC is charged on different periods of withdrawals differently.
For EG:- In the case of Parag Parikh Flexi Cap fund (Direct-Growth) an investor is charged a 2% exit fee if he withdraws his money before 365 days & a 1% fee if he redeems after 365 days but before 730 days.
So longer the investors stay invested in the fund the lower will be the exit load on the funds withdrawn.
6. Why consider load while investing?
‘Load’ like expense ratio is also a charge levied on investors while buying and selling mutual fund units. Load does not form part of the expense ratio, they are charged separately by mutual fund companies.
But load may be charged by the company to provide good service or to achieve a defined goal. For Eg:- In the case of the Parag Parikh Flexi Cap fund (Direct-Growth), the aim of the fund is to achieve long-term growth for which they require investors to stay with them for the long term that’s why they charge exit load fee for early withdrawals.
If the load is very high investor returns may be compromised to that extend.
Entry load on mutual fund scheme are abolished from August 1, 2009, so an investor need not worry about it.
Exit load is generally charged with time duration, so an investor before investing should check the offer documents and assess his own investment period.
I am not a SEBI registered investment advisor. This article is for information purposes any scheme or company name mentioned here is just for example & not a recommendation.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes.