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Entry Load & Exit Load – Cost to Investors

Introduction

Investing in mutual funds involves certain costs. Apart from the regular Expense Ratio (annual fee), funds may charge specific "loads" when you enter or exit the scheme. Understanding these loads is important because they directly reduce your investment amount or redemption proceeds, impacting your final returns.

1. Entry Load

Definition: Entry Load is a charge levied on the investor at the time of purchasing units. It is deducted from the investment amount, and only the remaining balance is invested.

Regulatory Status: ABOLISHED.

  • Since August 2009, SEBI has banned Entry Loads for all mutual fund schemes.
  • Reason: Previously, AMCs used entry loads (2.25%) to pay commissions to distributors. SEBI banned this to make pricing transparent. Now, investors pay commissions directly to advisors if they wish, or AMCs pay trail commissions from the expense ratio.
  • Impact: If you invest ₹100 today, the full ₹100 is invested. Zero deduction.

2. Exit Load

Definition: Exit Load is a charge levied on the investor at the time of redeeming (selling) units. It is a penalty for premature exit.

Purpose:

  • To discourage investors from pulling out money too soon.
  • To protect long-term investors from the cost of liquidity management caused by short-term traders.

How it Applies: Exit load is usually a percentage of the NAV (e.g., 1%) and applies only if redemption happens within a specific period (e.g., 1 year).

Typical Exit Loads:

  • Equity Funds: 1% if redeemed within 1 year (365 days). Nil after 1 year.
  • Liquid Funds: Graded exit load only for first 7 days. Nil after 7 days.
  • Debt Funds: Varies. Short duration funds may have no exit load.

Calculation Example

Let's assume:

  • Investment: 1000 units bought on Jan 1, 2023.
  • Redemption Date: Aug 1, 2023 (Redeemed within 7 months).
  • Exit Load Criteria: "1% if redeemed within 1 year".
  • NAV on Redemption Date: ₹50.00.

Step 1: Calculate Gross Redemption Value Value = 1000 units × ₹50 = ₹50,000

Step 2: Calculate Exit Load Amount Load = 1% of Gross Value = 1% of ₹50,000 = ₹500

Step 3: Calculate Net Redemption Proceeds Net Amount = ₹50,000 - ₹500 = ₹49,500

(Effectively, you sold at a price of ₹49.50 instead of NAV ₹50.00)

Comparison: Expense Ratio vs Loads

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No-Load Funds

Some funds do not charge any exit load at all. These are called "No-Load Funds."

  • Overnight Funds: Usually have zero exit load.
  • Ultra-Short Duration Funds: Often have very short or zero exit loads.
  • Significance: Ideal for parking money for very short durations (a few weeks) without fear of penalties.

Exam Notes: Writing the Answer

Question: "What is Exit Load? Why did SEBI abolish Entry Load?" (10 Marks)

Model Answer:

Exit Load: It is a fraction of the NAV deducted from redemption proceeds if the investor exits the scheme before a pre-defined period (Lock-in period).

  • Formula: Redemption Price = NAV × (1 - Exit Load %).
  • Objective: To deter speculative trading and encourage long-term holding.

Abolition of Entry Load: SEBI banned Entry Loads in August 2009 to strictly separate "advisory" from "distribution".

  • Transparency: Before 2009, agents earned upfront commissions from the entry load hidden in the investment.
  • Investor Benefit: The entire invested capital now works for the investor from Day 1. Commissions are now trail-based (paid by AMC) or direct advisory fees (paid by investor).

Summary

  • Entry Load: Banned (Since 2009). Full investment is allotted units.
  • Exit Load: Penalty for early withdrawal (typically < 1 year for equity).
  • Calculation: Deducted from the NAV at the time of payout.
  • Strategy: Always check the exit load period before investing to avoid unnecessary penalties.

Quiz Time! 🎯

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