No-Load Vs Load Funds

A no-load fund does not charge any load during purchase of new units/shares and at the the time of redemption/selling.

A load fund may either charge a load during purchase of new units/shares or at the the time of redemption/selling. There can be two types of loads that a mutual fund may charge:

  • Entry Load
  • Exit Load

Entry Load

Entry Load is charged when an investor purchases shares of a Mutual Fund. These charges are paid out to the distributors and reps, who have sold the mutual fund to the investor, to compensate for the expenses that they have made.

Example:
An investor is investing INR 10,000 in a fund where the entry load is 2% and NAV is INR 10. 2% will be deducted from the gross investment amount upfront. The net investment amount will be INR 10,000 Minus 2% of INR 10,000 = INR 9,800. So, 980 shares will be allocated to the shareholder.

If an investor wants to remain invested for a long time period, then 2% entry load should not bother much. Some mutual funds have a predefined breakpoint level which means that as the investment grows and the total account holding increases the entry load also decreases.

Example:
A mutual fund may have the following table to define the entry load on investment
Total Investment Entry Load Remark
0 to 50,000 2% Entry load of 2% is charged till the total holdings is below 50,000
50,001 to 1,00,000 1% An entry load of 1% is charged if the total holding is between INR 50,001 and INR 1,00,000
Greater than 1,00,000 0% No entry load if the total holdings is greater than INR 1,00,000

Exit Load

Exit Load may be charged by a mutual fund if the investor is redeeming (selling) shares. These are usually charged if the investor is redeeming his/her shares before a certain period. Some funds may charge an exit load of a certain percentage points to compensate for the losses that the fund has made by compensating for the distribution expenses.

A mutual fund may have paid out to the broker/dealer for bringing in the investor to the fund. The mutual fund did not charge an entry load and the investor was allocated shares worth the full investment amount. If the investor does not remain invested beyond a certain period (for example: 12 months), then the mutual fund deducts an amount at a certain percentage from the investor's holdings to compensate the amount it had paid out to the broker/dealer as advance commission.

Mutual funds may not charge any exit load if the investor does not redeem his/her shares for a certain period.

Example:
A mutual fund may use a table similar to the one below to charge exit load

Time Period Exit Load Comment
Less than 12 months 2% If the investor redeems the shares within 12 months of investment, then 2% is charged
Between 12 and 24 months 1% If the investor redeems the shares after 12 months but before 24 months from the investment date, then 1% is charged
More than 24 months 0% No exit load is charged if the investor does not redeem for 24 months from the date of investment

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