Mutual Fund Fees – Sales Charge/Entry –Exit Loads

 Mutual Fund units can either be bought directly from the fund house or from a distribution agent. Some percentage of your investment is deducted to account for administrative fees of the distributor. This could be done at the time of purchasing units (entry load) or at the time of redemption (exit load) or at both the times.

Entry load is also called ‘Front end Load’ and Exit load is also called ‘Back end Load’. These two loads are called ‘Sales Charge’. Because of entry load you will get less number of units (than you would get in its absence) and because of exit load you will get fewer amounts at the time of redemption (than you would get in its absence). Instead of charging at the time of entry or exit a fund can charge uniformly, which is called level load.

Some times back end charge is levied on tiered and deferred basis. The longer an investor holds units the lesser the back end charge is levied. For example a fund can charge 3% exit load if an investor exits within 1 year and 2% if he exits within 2 years and 1% if he exits within 3 years and no charge after 3 years. This is called Contingent Deferred Sales Charge (CDSC) .  The reason for encouraging investors to hold the units is a fund gets a fixed percentage of fees (to be discussed) on Assets under Management (AUM) towards administration expenses.

It can charge different fees for different investors. For example it can charge 2% for retail investments and 0.5% for large investments say 1Mn dollars.

There are restrictions on the fees that a fund can charge and it should disclose the fee structure to its investors.

Note: As per SEBI guidelines funds should not charge entry load. Investors pay directly to distributors. This means if you go directly to a fund you are free from ‘Entry load’.

Take a look at June 30th SEBI guidelines with regards to this.

SEBI Guidlines on Mutual Fund Loads

Again on August 7th it came up with one more restriction which says “In order to have parity among all classes of unit holders, it has now been decided that no distinction among unit holders should be made based on the amount of subscription while charging exit loads.”

 

 

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December 5, 2009 | Filed Under Mutual Funds 

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