Sunday, October 15, 2006

Loaded !!!!


A quick review…

Loads are fees or expenses recovered by Mutual Funds against compensation paid to brokers, their distribution and marketing costs. These expenses are generally called as sales loads. These are also referred to as front end loads and along the same line of thought there are back end loads that are charged on you even while you exit from the share holding of the fund (sales fees). Entry loads generally vary between 1.00% and 2.25%. Exit loads vary between 0.25% and 3.00%.

The Mutual Fund Regulations Act, 1996, has not clearly defined 'load'. However, the Act stipulates that the redemption price cannot be lower than 93% of the NAV, while resale price cannot be higher than 107% of the NAV in case of open-end schemes. In case of closed-end scheme, the repurchase price of units shall not be lower than 95% of the NAV.

Schemes cannot charge an entry load beyond 6% during the initial launch. If the load during the initial launch of a scheme is borne by the AMC, then these schemes are known as no-load funds. However, these no-load funds will have an exit load when the initial investor gets out of the scheme before a stipulated period, which is clearly stated during the initial offer. This is done to restrict short-term investors from getting into the scheme. Besides restricting short-term investors, the AMC can levy an additional management fee not exceeding 1% of the daily net assets in schemes floated on a 'no-load basis'. Under the exit load, besides the flat load, an AMC may be entitled to levy a contingent deferred sales charge (CDSC) for redemption during the first four years after purchase. However, the CDSC cannot exceed 4% of the redemption proceeds in the first year, 3% in the second year, 2% in the third year, and 1% in the fourth year.

Normally, closed-end schemes charge an entry load while having no exit load. But open-ended schemes do charge the load either at entry level/exit level, or at both stages. Equity-oriented schemes entail a higher cost in terms of brokerage, as these schemes require a greater persuasion from the intermediaries. Therefore, debt-oriented schemes do have a lower load when compared to equity-oriented schemes. Almost 98% of the debt-oriented schemes do not carry an entry load, but most of these schemes carry an exit load if the investor exits within 6 months from the date of making investments. The primary reason for this might be due to the returns generated by the schemes. The returns from these schemes generally hover around 12-13% per annum. If the scheme imposes a load, the real returns of investors from these schemes further come down making the scheme unattractive for investors.

Besides this, the funds do review the load structure periodically and have been using this as a selling proposition for mobilising new funds. Funds have also moved out from a uniform slab structure to a differential slab structure. This is done with the objective of mobilising funds from high net worth individuals and corporates.

The load might differ with the amount invested. The larger the amount invested, the lower the sales load. For example, Reliance Growth fund charges a 2.25 per cent sales load for investments up to Rs 1.999 Crores but only 1.25 per cent load is charged for investments over Rs 2.0 crores to 4.999 Crores.

Besides, the load could also depend on the period of investments. Birla Advantage charges a back load of 2 per cent for investments of less than two years and is a no load fund for investments over two years.

Funds also charge different loads from different class of investors. Initial investors, who had a no load entry into Chola Triple Ace are being charged a 2 per cent exit load. On the other hand, new investors in the scheme are being charged an entry load of 0.5 per cent and redemption is at NAV.

Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investment.

Entry Load; Exit Load; Contingent Deferred Sales Charge –Within proper limits,Don't look at these as a burden, just think of them as tolls you pay on the highway to big money!

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