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No entry load for Mutual Funds (MFs) – What does it mean for you?

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

Please click here to read “SEBI removes
entry load for open ended Mutual Funds (MFs)”
to know more about
SEBI’s announcement.

The Securities and Exchange Board of India (SEBI) has announced removal of
entry load from open ended mutual funds (MFs) when investors buy schemes
directly from fund houses. This is a move in the right direction, and
brings down the cost of investment for common investors.

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, 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.

With Entry Load No Entry Load
Your Cheque 10000 10000
Entry Load 2.25% 0.00%
Actual Investment 9775 10000
Rate of Return 12% 12%
Amount at the end of years: Difference
5 17226.89 17623.42 396.53
10 30359.67 31058.48 698.82
15 53504.11 54735.66 1231.55

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…

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SEBI removes entry load for open ended Mutual Funds (MFs)

Securities and Exchange Board of India (SEBI) has announced removal of entry load from open ended mutual funds (MFs) when...