How are entry and exit loads charged in SIPs?

What are entry and exit loads and on what amount are they charged? What would happen if I invest Rs 100 and exit at Rs 120, if the entry and exit loads are 2.5 and 2 per cent, respectively?

Please also tell me how these loads are charged when investments are through systematic investment plans? -- Arvind Kumar Gupta

An amount is charged when a person purchases fund, which is called entry load. This amount is deducted from the initial investment. For example, if Rs 100 is invested in a fund having an entry load of 2.5 per cent, then Rs 2.50 is deducted from Rs 100 and Rs 97.50 will be invested in the fund.

In the same manner, an amount is charged at the time of redemption from a fund known as exit load. Considering your example, if the invested amount of Rs 100 has grown to Rs 120 and the fund has an exit load of 2 per cent, then Rs 2.40 (2 per cent of 120) will be deducted at the time of redemption.

Hence, the amount redeemed would be Rs 117.60. However, the exit load of various schemes may vary with the investment tenure and investment amount.

These loads (entry/exit) vary from scheme to scheme, but have to be within the limit prescribed by the market regulator, the Securities and Exchange Board of India. You can save the entry load by investing directly through the AMC.

The same rules govern the SIP model. In SIP, each instalment is taken as a new investment and, hence, you will be charged an entry load for it.

However, some fund houses do not charge an entry load on SIP investments.

I have invested in fixed maturity plans of a duration of more than one year. I have also incurred short-term capital loss from redemption of units of equity mutual funds in the current year.

I wish to know if this short-term capital loss can be set off against my income from FMPs. If yes, will I be able to claim the indexation benefit on the FMP before setting off the short-term capital loss? -- Nitin Aggarwal

According to income tax regulations, short-term capital loss can be set off against both short-term capital gain as well as long-term capital gain. So, you can avail yourself of this benefit to square off your losses.

You can also take advantage of indexation on the gain on FMP to reduce your tax burden before setting off your short-term capital loss.

If I want to have gold in my portfolio as a hedge against extreme crisis. Gold ETFs may not help much, if there is a national calamity and the government is in danger, Gold ETFs (as they are  after all merely paper) may be difficult to encash.

Can you please confirm my above conclusion? -- Sambaran Mitra

Investing in gold may be a good option to hedge against inflation and extreme crisis. It can be done in two ways. One can either hold gold in the physical form or can make investment in Gold ETFs.

If you are over-cautious and always play on