Load is the factor that is applied to the Net Asset Value (NAV) of a mutual fund scheme to arrive at the price. If a commission is paid to agents to bring in new business this represents the cost incurred by the mutual fund for additional sale. The fund may therefore decide that, investors who are already in the scheme need not bear this cost. Therefore, it may decide to impose this cost on the new investors by increasing the price at which they can buy units. This is called the sales load. Similarly, if an investor stays in a fund for a short while and decides to repurchase his units, the fund may incur some costs in liquidating the portfolio and paying off this investor. The fund may want to impose the cost of this operation on the exiting investor in the form of a load. This is called an exit load.
Sales Charges (Loads) are the commissions that you may have to pay when you buy or redeem units of a fund. Sales charges may be applied when you buy units of the fund (A front-end load), when you redeem your units (a back-end load), or there may be no sales charges at all (no-load). Where front-end loads are charged, the rate can vary from dealer to dealer and may be negotiable. Shop around, and remember that every dollar you pay up-front in commission is a dollar that does not go to work for you in the fund. Many funds are sold on a back-end load basis, meaning generally that the sales charges are applied only when you redeem the fund. Back-end load fees are paid by the fund management company to your mutual fund salesperson – you do not pay this fee. You do, however, pay a ‘redemption fee’ if you redeem your units in the fund before a certain time period, typically 7 years. Redemption fees decline each year that you hold the investment. For example, you might have to pay a 6% fee if you redeem the fund after one year, 4% if you redeem after three years, and no commission if you redeem after seven years. An increasing number of funds are being sold on a no-load basis, in which investors pay no sales charges, but before you decide that a no-load fund is right for you, consider the fund’s performance, its management expense ratio and the level of service and advice you will receive.
Mutual Fund Load is a percentage adjustment to the NAV. If there was no load, investors will be able to buy and sell their units at the NAV. However, if there is an entry load, new investors will pay price that is higher than the NAV to the extent of the load. Similarly, investors who exit will take away a sum that is lower than the NAV to the extent of the load.
Mutual funds have a choice. Mutual funds may decide to impose no loads or only the sales load or the exit load. If there are no loads, then the costs associated with sales and repurchases are being borne by the AMC, and not imposed on the mutual fund scheme. In some cases, mutual funds may decide that the exit load will depend on the period for which the investor has stayed in a scheme. The longer the investor stays, the lower the load. This system is to ensure that short-term investors pay a higher load than long-term investors.
Regulation 49(3) of SEBI (Mutual Funds) Regulations, 1996 has laid down certain parameters for the determination of sale price and repurchase price of mutual funds. Some of the mutual funds use two methods for the sale and repurchase NAV computation that led to variations in the amount payable to the investors or the number of units allotted to them. SEBI decided that a uniform method shall be used for the computation of sale and repurchase prices. The following are the formulas that shall be used:
- Sale Price = Applicable NAV x (1 + sales load)
- Repurchase Price = Applicable NAV x (1 -exit load)
If the applicable NA V is Rs.12 and sales or the entry load is 3% and the exit or repurchase load is 2% then the sale price will be Rs.12.36 and the repurchase price will be Rs.11.76.