Exit Loads and Entry Loads

Priya and Ravi are delving further into the specifics of investing in mutual funds. In their most recent conversation, they encountered phrases like "entry load" and "exit load." Ravi questions whether they should consider these fees when making decisions, and Priya wants to know how these fees impact their investments.

They choose to delve into entry and exit loads to ensure that they completely comprehend these expenses and how they affect their investment strategy.

The price you pay to buy mutual fund units is known as the entry load. Not all funds have this facility, and only a small number do. If some fund has an entry load, then a small portion of your investment is utilised to cover this cost, which is deducted from the total amount you invested. For example, if you invest ₹10,000 and the entry load is 2%, you’ll only invest ₹9,800. The entry load is usually a one-time fee that gets charged at the time of purchase.

Entry loads are becoming less common. In 2009, the Securities and Exchange Board of India (SEBI) banned entry loads for most mutual funds. However, some funds still charge this fee, especially in specific situations like investments made through certain distributors. It’s essential to check whether an entry load applies before investing so you know exactly how much of your money is going into the fund.

On the other hand, an exit load is the amount you pay when you redeem or sell your mutual fund units. This fee is charged as a percentage of your redemption amount and is usually levied if you sell your units within a specified period, say one or two years from the date of investment. It discourages short-term traders from jumping in and out of the system and encourages long-term investing.

Assume that you have invested ₹ 10,000 in a fund. After one year, the value of your investment has grown to ₹ 12,000. If the fund has an exit load of 1%, you will be charged ₹ 120 when you redeem your investment.

The exit load is calculated based on the time you’ve invested. The longer you stay invested, the lower the exit load will usually be. Some funds do not have any "exit load," and you do not have to pay anything if you sell them or redeem your units.

It's crucial to remember that different funds have different rates and that not all funds have exit loads. The particular mutual fund plan determines the precise percentage and holding duration. Before investing, always review the scheme documents or speak with your financial advisor to fully understand these fees.

Both entry and exit loads are costs that affect your returns. Even though they might seem small at first glance, they can add up over time. That’s why it’s essential to factor in these fees when comparing mutual funds. For long-term investors, exit loads may not matter as much if they plan to hold onto their investments for a while. But these fees could make a significant difference if you want short-term gains.

While exit and entry loads seem like hidden costs, they are meant to serve a purpose. They help cover the fund’s operational expenses and discourage frequent trading, which can be costly for both the fund and the investor. You can make better investment decisions if you are aware of these fees.

Conclusion:

After learning about entry and exit loads, Ravi and Priya realise how important it is to check a mutual fund’s fee structure before investing. They understand that while these charges may seem minor, they can significantly impact their returns over time. Feeling better equipped with more knowledge, they're ready to proceed cautiously and consider those costs when selecting funds. Next, we will review the mutual fund transaction process and the role of financial advisors to help you navigate these processes and understand how an advisor can help you make the right investment decisions.