Loading is a charge which an asset management company (AMC) of a mutual fund may collect on entry or exit from a fund. A load is levied to cover the up-front cost incurred by the AMC to sell the fund. It also covers one-time processing costs. A load is the fee paid upfront to a AMC, and brokerage , to invest the funds by the mutual fund.
There are expenses to be paid to convert cash one invests in stocks or bonds. In addition to that, a fund needs to pay commission to the broker who brought the business. The load is charged normally as entry load and exit load. Entry load is charged at the time of entry or investment, exit load is charged at the time of sale. Most of the fund companies waive the exit load after a certain period of holding.
One should review fees, including those of no-load funds, before investing. Even small differences in fees can translate into a large difference in returns over time.
An entry load is an additional cost that an investor pays at the point of entry. Assume that your proposed investment is Rs 20,000. Also assume that the current NAV of the fund is Rs 12 and that the entry load is Rs 0.50. Then, you will receive 10,000 divided by 12.50, that is 1,600 units.
An exit load is levy that an investor pays at the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the current NAV of the fund is Rs 15 and that the exit load is Rs 0.50. Now, if you sell 1,600 units, you stand to receive 1,600 multiplied by 14.5, that is, Rs 23,200.
Funds usually charge an entry load ranging between one and two per cent. There are some funds which don’t charge any fee for initial investments. Usually, index funds, bond funds and liquid funds provide this benefit. These funds do not charge any entry or exit loads. A no-load fund may charge fees that are not sales loads, such as purchase fees, redemption fees, exchange fees, and account fees. Noload funds will also have operating expenses.
A mutual fund provides details of how much you should expect to pay each year in loads and operating expenses. For example, assume you invested Rs 10,000 in a mutual fund a year ago. You paid a two per cent front-end load and the fund’s operating expense ratio was 1.5 per cent. The value of the fund’s portfolio increases 10 per cent in the first year that you own the units. Since the fund took Rs 200 upfront in transaction fees, your net initial investment was Rs 9,800. A year later, your initial investment is actually worth Rs 10,780, for a one year rate of return of 7.8 per cent. Next, deduct the 1.5 per cent in operating expenses using the midpoint value of your units during the year - Rs 9,800 plus Rs 10,780 divided by 2, or Rs 10,290. Multiply that amount by 1.5 per cent to get Rs 154. If you subtract Rs 154 in operating fees from the value of your fund units, your after-fee return is Rs 10,626, for a one year rate of return of 6.26 per cent. So, the returns are 6.26 per cent instead of 10 per cent. As this example shows, loads and fees of a mutual fund can take a substantial chunk from their investment returns.
Mutual funds are required to show their fees and loads. The investor should compare the load charges - both entry and exit - before deciding to invest in a mutual fund. The NAV should not be the sole criterion . The entry and exit loads can have a substantial impact on the returns to the investor.
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