This article demonstrates the benefit of having no entry load (for MFs) on a long term investment.

Usually, an entry load of 2.25% is charged for all investments in an MF. The entry load is charged largely to meet marketing expenses of a fund house, a large portion of which is the commission given to agents and distributors.

Agents get this commission, because they claim that they advise investors to invest in specific schemes depending on their individual situations. This is rarely a case though, as most of the MF agents are seen pushing schemes that provide them a higher commission - like MF New Fund Offers (NFOs).

Apart from this, due to the availability of information and customized investment advice on the internet (like on www.RaagVamdatt.com), many investors are in a position to decide on the MF scheme themselves. In these cases, investors can buy directly from a fund house instead of going through an agent.

When an investor buys directly from a fund house, it is a transaction between the investor and the fund house, with no intermediary in between. Thus, there is no commission involved, and therefore, it is logical not to charge an entry load in this case. So, it is a very wise move.

Now, how does it impact your investments?

We know that compounding is a very powerful weapon. (Please see "Goal Based Investing" to read more on this). When an investment is made for a long term, even a small difference in the invested amount can make a huge difference in the end result due to the effect of compounding.

When an entry load is charged, it has a direct impact on the amount invested - the entry load is deducted from your cheque before the money is invested. Thus, if you are investing Rs. 1000, and entry load is 2.25%, only Rs. 977.5 is actually invested on your behalf.

It looks like a small difference, doesn't it? Let's see how compounding works here using numbers.

Thus, we can see that for a long term investment, the removal of entry load can make a big difference.

So, if you know the MF scheme you want to invest in, go ahead and deal directly with the fund house - it would improve the return of your portfolio without any extra investment or without taking any risk!

Happy investing…

Other articles you might be interested in:

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Note: Please treat the opinion expressed here as a broad suggestion. Please consult your financial planner / investment advisor before making any investment decision.