Investing in mutual funds (MFs) is better than going directly to the stockmarket as your money is professionally managed, your portfolio is diversified and you don't have to go through the hassle of choosing the right stock or bond to invest in. There are experts to do the job for you. But all this comes for a price.
In the first of our two-part series on expenses, we take you through two key front-end charges that you pay while buying MF schemes.
Entry loadWhen you invest in an ongoing MF scheme, you are required to pay a one-time, front-end charge - a percentage of the applicable net asset value (NAV) - over and above your scheme's NAV. Called the entry load, this sum is typically passed on to the agent as his commission. Assume you invest in a scheme whose NAV is Rs 50 and entry load 2.25 per cent. The price at which you will buy (sales price) its units will be Rs 51.13. While Rs 1.13 will be passed on to the agent, the balance Rs 50 will be deployed in the markets. Your investment will start growing from Rs 50 and not Rs 51.13 - the price you paid. The formula used to calculate sales price for a fund with entry load is: sales price = applicable NAV x (1+entry load in fractions).
Remember that if you enroll for a systematic investment plan (SIP), entry loads will be imposed on all your instalments.
How muchThe Securities and Exchange Board of India (Sebi) stipulates that MFs cannot charge an entry load of more than 7 per cent of their prevalent NAV. Entry loads are typically decided by competition - if one MF raises its entry load, others usually follow. For instance, before 2005, MFs did not charge entry loads for SIPs. But, after a few fund houses imposed entry loads of 1.25 per cent in 2005 - and raised them to 2.25 per cent in 2006, others did