What Are Entry and Exit Loads in a Mutual Fund?
Mutual funds offer a higher return with a low risk and are ideal for the long run. This is primarily because the fund is invested in a mix of debt and equity, which diversifies the overall portfolio. Trained fund managers do an investment in mutual funds on your behalf and send you periodical communications. But everything comes at a cost. All asset management companies (AMCs) charge a particular sum from the investors to cover their distribution expenses, operational costs, and other transactional charges. So whenever you buy a mutual fund or want to exit from a specific scheme, you will incur some expenses. The two main charges are the entry load and the exit load.
What is Entry load?
Entry load is the amount charged when an investor purchases particular units of a scheme. It is a percentage of a fee that is levied on the purchase.
Different schemes have different entry load percentages. Hence, if you have set aside an amount of INR 10,000 for investment in a scheme with a 5% entry load, your investment amount will come down to INR 9,500.
The good news for investors in India is that post August 1, 2009, Securities and Exchange Board of India (SEBI) has implemented a “no entry load” rule on mutual funds. This means your entire amount will be invested without any deductions. However, there might be separate fees or commission charged by the distributors, which may differ from one scheme to the other.
What is Exit load?
The exit load, as the name suggests, is levied when the investor redeems the investment in mutual funds before the stipulated period. It is charged by mutual fund companies to cover for expenses incurred in the investment. There are a few funds on which no exit load is charged. These funds are called no-load funds.
Currently, AMCs charge anything between 0.50% to 3% depending on the holding period and the scheme. In case the investor retains the investment until the end of the stipulated period, no exit load will be charged. So you must always aim to buy a mutual fund for long-term investment and remain invested till the end of the tenure in order to avoid the exit load. If you can save on the exit load, you will be able to notice a significant difference in the amount you receive at the end of the holding period.
Contingent deferred sales charge
There is one more type of exit load, which is known as Contingent Deferred Sales Charge (CDSC). This exit load varies with respect to the period of investment. So longer an investor remains invested, lower is the exit charge. If the investor chooses to redeem the fund much before the due date, the exit load charged is substantially high and vice versa.
Every investor should know about the cost of their investment plans well before initiating any. Consider all the associated costs before you make an investment decision. When you have advanced tools like the ARQ investment engine, offered by the Angel Bee app at your disposal, making the right investment decisions may not be difficult. It is free of any human intervention and uses advanced algorithms to offer customized investment recommendations to you. To make the right financial choices, download the Angel Bee mobile application, today.