Load is the price of buying a unit. An entry load is a charge that may be levied on an investor when buying the units of a scheme. Typically, the investor pays a ‘premium’ over the NAV of the scheme to account for the entry load, in proportion to the percentage charged to the investor as an entry load. The entry load percentage is added to the prevailing NAV at the time of allotment of units. An exit load is a charge that may be levied on an investor when exiting a scheme.
When an exit load applies to redemption from a scheme, the investor may sell his units back to the fund at a ‘discount’ to the stated NAV, in proportion to the percentage charged as an exit load. The exit load percentage is deducted from the NAV at the time of redemption (or transfer between schemes). This amount goes to the Asset Management Company and not into the pool of funds of the scheme.
Entry/exit loads and initial issue expenses qualify as one-time charges, as opposed to recurring expenses. First, let's consider the case of new fund offers (NFOs). Over the last few years, investors have been faced with a deluge of NFOs. But in recent times, a perceptible trend in NFOs has been a rise in the number of close-ended funds.
This phenomenon can be traced to the rules governing initial issue expenses. Close-ended funds are not permitted to charge any entry load; instead 6% of the sum mobilized during the NFO period can be utilised to meet the initial issue expenses. The same can be amortised (charged to the fund) over the fund's close-ended tenure.
Conversely, in the case of open-ended NFOs, funds are required to meet all the sales, marketing and distribution expenses from the entry load. They are not permitted to charge any initial issue expenses. The rules governing entry/exit loads state that taken together, the two cannot account for more than 6% of the net asset value (NAV).
Charging an entry load for the entire 6% upfront would adversely affect the fund's performance in the initial period. Hence AMCs choose to have rather "rational" entry loads in the range of 2.25%-2.50%. Like initial issue expenses, entry loads also eat into the investor's returns, since the investor has that much less money working for him.
It is not difficult to understand why AMCs have a newfound liking for close-ended funds. With the provision for charging 6% of amount mobilized towards initial issue expenses, AMCs are better equipped to compensate the distributors and agents, who in turn help the fund houses in accumulating more assets. Higher assets translate into higher revenues for the AMCs.
Of course, close-ended funds do offer advantages as well. For example, the fund manager can make investments from a long-term perspective and investors are given the opportunity to invest for a pre-defined investment horizon. However, investors would do well to factor in the costs involved.
Entry Load Entry Load Exit Load
LIC MF Index - Sensex Plan (G) 2.25% 1%
Reliance Index-Sensex Plan (G) 1% 0%
UTI Master Index Fund (G) 0% 1%
In the above table when we compare three different funds on the basis of load charges we see that Reliance charges an entry load of 1% and 0% exit load while it’s the other way round for UTI Master Index Fund. UTI charges an entry load of 0% and an exit load of 1%.
So then how do we decide which is a better fund. In a fund where there is an entry load means that you have already paid the charges irrespective of whether you make profit or loss. While in a fund where there is an exit load you pay the charges only when you make an exit.
Thus you have a chance to earn profits and then pay the load. And normally an investor would only make an exit when he earns some profit. So I think that UTI Master Index Fund is a better fund to invest in
When an exit load applies to redemption from a scheme, the investor may sell his units back to the fund at a ‘discount’ to the stated NAV, in proportion to the percentage charged as an exit load. The exit load percentage is deducted from the NAV at the time of redemption (or transfer between schemes). This amount goes to the Asset Management Company and not into the pool of funds of the scheme.
Entry/exit loads and initial issue expenses qualify as one-time charges, as opposed to recurring expenses. First, let's consider the case of new fund offers (NFOs). Over the last few years, investors have been faced with a deluge of NFOs. But in recent times, a perceptible trend in NFOs has been a rise in the number of close-ended funds.
This phenomenon can be traced to the rules governing initial issue expenses. Close-ended funds are not permitted to charge any entry load; instead 6% of the sum mobilized during the NFO period can be utilised to meet the initial issue expenses. The same can be amortised (charged to the fund) over the fund's close-ended tenure.
Conversely, in the case of open-ended NFOs, funds are required to meet all the sales, marketing and distribution expenses from the entry load. They are not permitted to charge any initial issue expenses. The rules governing entry/exit loads state that taken together, the two cannot account for more than 6% of the net asset value (NAV).
Charging an entry load for the entire 6% upfront would adversely affect the fund's performance in the initial period. Hence AMCs choose to have rather "rational" entry loads in the range of 2.25%-2.50%. Like initial issue expenses, entry loads also eat into the investor's returns, since the investor has that much less money working for him.
It is not difficult to understand why AMCs have a newfound liking for close-ended funds. With the provision for charging 6% of amount mobilized towards initial issue expenses, AMCs are better equipped to compensate the distributors and agents, who in turn help the fund houses in accumulating more assets. Higher assets translate into higher revenues for the AMCs.
Of course, close-ended funds do offer advantages as well. For example, the fund manager can make investments from a long-term perspective and investors are given the opportunity to invest for a pre-defined investment horizon. However, investors would do well to factor in the costs involved.
Entry Load Entry Load Exit Load
LIC MF Index - Sensex Plan (G) 2.25% 1%
Reliance Index-Sensex Plan (G) 1% 0%
UTI Master Index Fund (G) 0% 1%
In the above table when we compare three different funds on the basis of load charges we see that Reliance charges an entry load of 1% and 0% exit load while it’s the other way round for UTI Master Index Fund. UTI charges an entry load of 0% and an exit load of 1%.
So then how do we decide which is a better fund. In a fund where there is an entry load means that you have already paid the charges irrespective of whether you make profit or loss. While in a fund where there is an exit load you pay the charges only when you make an exit.
Thus you have a chance to earn profits and then pay the load. And normally an investor would only make an exit when he earns some profit. So I think that UTI Master Index Fund is a better fund to invest in