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Mutual funds offer a convenient way to participate in capital markets, but associated costs can eat into the eventual proceeds. Investing wisely means knowing how fees can affect profits as a whole.
When investing in mutual funds, retail investors often encounter terms like entry load and exit load fees.
In today’s article, we will look into what entry and exit loads are, while specifically focusing on no-load funds. Let’s begin!
Understanding entry load and exit load in mutual funds
A scheme’s entry load is the sum or fee imposed on an investor at the time of their investment. When an investor decides to leave a scheme, they may be required to pay a fee known as an exit load.
The entry load is often collected to help the business with its distribution expenses. Various mutual fund houses charge various entry loads. However, entry load charges on any mutual fund scheme in India have been prohibited by market regulator SEBI since 2009.
On the other hand, exit loads are imposed to prevent investors from exiting their mutual fund plans; the goal of collecting this exit load is to lower the number of withdrawals.
Now that we have understood what entry and exit loads are in mutual funds, let’s dive into what no-load mutual funds mean.
What are no-load mutual funds?
Unlike load funds, investors in no-load funds do not have to pay a fee when buying or selling shares. Investors may choose a fund that does not impose sales charges, sometimes known as the “load,” with no-load mutual funds.
Buying and selling stocks in no-load mutual funds does not incur sales charges or commissions. Rather than relying on middlemen, the AMC (Asset Management Company) deals directly with participants to sell funds. This results in cost reductions because no third party is involved in this case.
Several mutual fund companies in India that provide no-load funds include DWS Alpha Equity, JM Nifty Plus, and HDFC Index Sensex Plus, among others.
Reasons to opt for mutual funds without exit loads
- Since there is no load in a no-load fund, the investment amount goes solely towards purchasing shares. This might lead to greater returns for the investor because fees won’t eat away at the investment. For this reason, these funds might appeal to budget-conscious investors.
- Lastly, investors may have more control with no-load funds. Because no-load funds do not have sales commissions or loads, investors can buy or sell shares whenever they choose. This feature may be helpful for investors who wish to sell their investments often or want easy access to their funds.
Factors to consider when investing in no exit load mutual funds
Although there are no sales charges with no-load funds, there are still some drawbacks associated with these funds:
- Greater expense ratios
To compensate for operating expenses, no-load funds may have higher expense ratios than load funds, as they do not levy a sales fee. As a result, the long-term returns for investors might be lower.
For example, a load fund like the Nippon India Index Fund S&P BSE Sensex Plan-Growth has an expense ratio of 0.58%, whereas, in a no-load fund like the HDFC Index Fund – S&P BSE SENSEX Plan, it is only 0.2%.
- Costs associated with redemption
Some no-load funds include redemption fees that investors must pay if they sell their shares within a particular period after the acquisition. For example, the HDFC Index Sensex Plus Direct Plan Growth imposes an exit load of 0.25% if you redeem the units within 3 days.
This might be inconvenient for investors who have to sell their shares for unexpected reasons and end up paying costs they didn’t anticipate.
- Few investment opportunities
For investors seeking a particular investing strategy or kind of investment, the limited variety of investment options offered by no-load funds compared to load funds could be a drawback. Most of these invest in index or liquid funds owing to the no-load. Thus, it becomes difficult to pay out fees for fund house advisory. These funds are limited to low research instruments which do not require active research.
Load funds vs. no-load funds
There’s no doubt that fees can lower an investor’s long-term gains. That is why no-load funds have an edge due to often lower buying and selling costs.
In short, it depends on the investor’s preferences whether they prefer compromising when investing in a broad range of assets with no loads or vice versa.
Conclusion
Load and no-load mutual funds are different and available to investors, depending on whether they purchase and sell shares independently or through a broker.
Before choosing an option, it is critical to weigh each of these aspects since your final selection may significantly affect your long-term results.
FAQs
No-load mutual funds are those that do not charge any fees or commissions when you buy or sell the fund units. You can invest in them directly from the fund house or through online platforms without paying any intermediaries.
Load funds are those that charge a fee or commission when you buy or sell the fund units. The fee can be front-end (charged at the time of purchase) or back-end (charged at the time of redemption). On the other hand, no-load funds do not charge any such fee.
No-load funds make money by charging an annual expense ratio, which is a percentage of the fund’s assets under management. This covers the fund’s operating expenses, such as management, administration, marketing, and distribution. The expense ratio varies depending on the fund category and size.
When selecting a mutual fund plan, you should consider the following factors:
How well the mutual fund has done in the past, looking back over its history.
If your financial goals match the fund’s,
The fund manager’s expertise,
The expense ratio,
If it matches your risk profile,
Taxes applicable on capital gains.
You don’t need to invest only in no-load funds. While no-load funds are cheaper, they may not suit your investment objectives, risk profile, or time horizon. You should also consider other factors, such as the fund’s performance, risk, return, expense ratio, and suitability for your financial goals.