What is meant by mutual fund loads?
When you invest in mutual funds, you might encounter the term “load.” A load is a fee or commission you pay when buying or selling a mutual fund. This fee is paid to financial intermediaries like brokers, advisors, or agents who help you choose the right fund. The purpose of the load is to compensate them for their expertise in guiding your investment choices.
Types of Loads in Mutual Funds
- Entry Load: This was once a fee charged when you initially invested in a mutual fund. However, in 2009, the Securities and Exchange Board of India (SEBI) banned entry loads, so there is no entry load on mutual funds anymore.
- Transaction Charges: Since 2011, mutual funds can charge a small fee on your investment.
- If you are a first-time investor and invest less than ₹10,000, there’s no fee.
- If you invest more than ₹10,000, the fee is ₹150.
- For existing investors, if you invest more than ₹10,000, the fee is ₹100.
- If you invest through a Systematic Investment Plan (SIP) and your monthly investment is over ₹10,000, you’ll pay ₹100 as a transaction charge, spread across four months starting from the second payment.
- Exit Load: This is a fee charged when you sell your mutual fund before a certain time. The purpose is to discourage investors from withdrawing too soon. The exit load can range from 0.25% to 3%, depending on how early you exit. For example, if you sell a fund within a year, you may be charged an exit load. Liquid funds usually don’t have exit loads since they are designed for short-term investments.
Load vs No-Load Funds
- Load Funds: These funds charge a fee when you buy or sell the mutual fund. The cost can range from 1% to 8%. For example, in a front-end load fund, the fee is paid when you buy the fund, while in a back-end load fund, the fee is paid when you sell the fund.
- No-Load Funds: These funds don’t charge any sales fee. However, third-party brokers may charge fees for handling the investment.
Why Loads Matter
Before investing, it’s essential to consider the load fees, which affect your returns. While load funds provide expert advice and professional management, they come with higher costs. On the other hand, no-load funds are more straightforward and cheaper but may not offer the same level of guidance.
Advantages of Load Funds:
- Expert Guidance: Financial intermediaries provide expert advice to help you make informed decisions.
- Better Performance: Professional management tends to yield better returns.
- Diversification: These funds invest in various assets, reducing risk.
Disadvantages of Load Funds:
- Higher Costs: The load fees can reduce your investment amount.
- Less Flexibility: Some funds have restrictions on buying or selling units.
- Ongoing Fees: Some load funds charge annual fees that can reduce long-term returns.
In conclusion, load funds provide expert management but come with higher fees. To avoid additional charges, it’s essential to weigh these costs against potential returns and consider no-load funds.
