Difference Between Load And No-load Mutual Funds

Fund houses typically levy an amount on investors when they join or leave a scheme. AMCs (Asset Management Companies) charge this sales commission called a load for paying financial advisors, brokers, or other intermediaries. 

Depending on when the charge is levied, there are two types of loads for mutual funds. The first is the entry load which is imposed on investors when entering/joining a scheme. The second is the exit load, applicable at the time of exiting/leaving a mutual fund scheme. 

Read along to know this and the differences between load and no-load funds.

What Is a Load Mutual Fund and How Does It Work?

Load funds are those mutual funds that charge a sales fee or commission for units purchased or redeemed. The load fee is generally a percentage of total investment or sometimes a flat fee. This fee varies from one AMC to another.

AMCs can charge a ‘load’ to recuperate the costs involved with distribution, marketing and additional management for the maintenance of a mutual fund scheme. 

Since 2009, the market regulator SEBI has banned the practice of charging entry loads on all mutual fund schemes in India. You can directly invest in any of the AMC’s schemes by submitting your application form without paying an entry load. Before this, fund houses in India could charge up to 2.25% as an entry load.

However, most AMCs still charge a certain exit load for exiting a mutual fund scheme early. AMCs usually charge anywhere from 1% to 5% to discourage investors from opting out of a scheme prematurely.

Also Read: Overnight Mutual Funds

What Is a No-load Mutual Fund?

In no-load mutual funds, securities are bought and sold without commission or sales charges. The AMC directly sells funds to the investors without the requirements of any brokers or agents. This leads to the savings of additional costs as there is no third-party involvement. 

Loads for mutual funds reduce the returns from your investment. It is important to note that no-load funds do carry some charges, namely the expense ratio. Only the sales charges are non-applicable, which does reduce the overall expense ratio. Hence, expense ratios of mutual funds sold directly from fund houses are usually lower than regular funds sold by third parties or brokers.

Those looking for a non-load mutual fund may want to check Navi Nifty 50 Index Fund. It offers the benefit of no entry or exit load along with the lowest expense ratio. You can start investing in the Navi Nifty 50 and other Navi Mutual Funds through Zerodha, Paytm Money and Groww, to name a few.

Why Would Anyone Choose to Buy a Load Mutual Fund?

While it seems on the surface that investors would not want to buy load mutual funds, there can be several reasons to do so. Given are some of the reasons why some people choose load funds:

• Load funds are primarily designed to provide compensation for fund managers and brokers. In exchange, they spend time and energy researching financial securities that are more likely to generate high returns. 
• Many investors do not feel comfortable making investment decisions on their own. They need the help of financial advisors to make sensible financial decisions that are in their best interest.
• Some people have an existing relationship with their financial advisor and may not want to damage the said relationship by pursuing investments on their own. 
• According to some experts, brokers and financial advisors prevent their clients from making rash decisions, especially during market downturns. 

Besides these reasons, fund houses also prefer load funds as it encourages long-term investments, which bring little stability to the markets. Moreover, it helps them have enough liquid cash to pay investors by redeeming their mutual funds.

Also Read: Total Expense Ratio In Mutual Funds

Reasons to Choose No-load Mutual Funds

The following are some of the advantages of no-load mutual funds:

• Cost-effective: No-load mutual funds are more cost-effective as they do not carry distributor’s fees, sales charges and other commissions. This also results in a lower overall expense ratio for these mutual funds and, thus, more savings upon redemption. 
• Reinvestment of the full amount: In a no-load fund, the entire amount, including the returns, is reinvested by the fund manager. This is because the AMC doesn’t have to pay extra charges to brokers or distributors. This results in more returns over time. 
• No need for brokers or agents: With no-load funds, investors do not have to depend on investment decisions made by brokers, agents, distributors or managers. You can do your own research and decide independently on which funds to invest in.

Final Word

Between load and no-load funds, the latter may seem more attractive for investors looking for a lower expense ratio. Load mutual funds carry an additional exit load but offer the expertise of a broker or agent. People willing to spend time and effort on proper research may choose no-load funds.  

Frequently Asked Questions

 1. What is an expense ratio for a mutual fund?

The expense ratio is the yearly fee that fund houses impose on investors to cover the operating expenses of a scheme. Such expenses include marketing costs, administrative fees and management fees. Actively managed funds typically charge a higher expense ratio to pay the fund managers for overseeing the investments. 

 2. Why did SEBI remove entry load on all mutual fund schemes?

SEBI opted to remove entry loads to increase transparency in commission charges for fund distributors and encourage long-term investments. Distributors now get compensation only in relation to their services provided. It was also meant to safeguard investors’ interests and make mutual funds more cost-effective. 

 3. What are some of the factors involved in choosing the right mutual fund?

The following are some of the factors you will want to check when choosing a mutual fund scheme:

• The past (historical) performance of the mutual fund over a long period.
• If the fund’s objective aligns with your financial goals.
• Experience of the fund manager
• Expense ratio charged by the AMC
• If its risk aligns with your risk profile
• Taxes applicable on capital gains

4. What are SEBI’s guidelines for charging TER from customers?

As per SEBI Regulations 1996, all mutual fund houses can charge TER to meet their operating expenses. There are no limits on any expense under TER as long as it is within prescribed limits. 

For Assets Under Management (AUM) of Rs. 500 crores, an AMC can charge TER of up to 2.25% in the case of equity funds. For debt funds, the maximum limit is 2% of the daily net assets.

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Disclaimer- Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.