# Why are Buy and Sell Prices Different?

I want to start investing in mutual funds. But I keep wondering that why the buy and sell prices different for some funds and same for others. How would it affect the value of my investment?

I want to start investing in mutual funds. But before that I want to know why is it that the buy and sell price is different for some mutual funds and the same for others?
Sumit Bhalla, via e-mail

Basically, buy price is the price at which you enter a fund and sell price is the price at which you exit a fund. What makes the two different is the entry and exit load charged by a fund. However, in a no-load fund the buy and the sell price is same—i.e., equivalent to its Net Asset Value (NAV).

Let's explain this with the help of an example. Suppose you want to invest Rs 5,000 in a fund, whose NAV is Rs 12 and charges an entry load of two per cent. This mean that the price at which you would purchase units from the fund would be two per cent higher than the NAV. Two per cent of Rs 12 is Rs 0.24. So, your purchase price will be the NAV plus this sum, i.e., Rs 12.24. So in the case where entry load is levied, the purchase price becomes higher than the NAV.

Another way of looking at this is that two per cent of your investment would be deducted towards meeting the load. Two per cent of Rs 5,000 is Rs 100. This means that of the Rs 5,000 investment amount, only Rs 4,900 would go to the fund, with Rs 100 going towards meeting the load. Similarly, when you exit a fund whose current NAV is Rs 12 and it levies an exit load of two per cent, the sell price would work out to Rs 11.76. Here the load, Rs 0.24 (two per cent of NAV, Rs 12) is deducted from the NAV. As a result of this, selling price in case of an exit load is always lower than NAV.

Generally, all equity funds charge an entry load except for some UTI schemes, which levy exit load. On the other hand, most debt funds don't charge any entry or exit load. Instead, they levy Contingent Deferred Sales Charge (CDSC). CDSC is kind of exit load, which is charged by the fund if units are redeemed within a specified period. After the expiry of that period, the fund becomes a no-load fund. Thus, within the CDSC period, the selling price will be lower than the NAV of the fund. And after the expiry of the CDSC period, the sell price will be the NAV of that fund.

Therefore, the buy and sell price just reflects the price at which a fund is available for purchase or redemption, respectively. The higher the entry load, the higher is the buy price, whereas the higher the exit load the lower is the value you would receive on redemption of your investment.