A check list of the various loads being charged by fund houses and their impact on your returns.
11-May-2001 •News Desk
Investors hate load. Simply because they end up spending a part of their saving, sometimes even before the saving begins its work. Buying a load fund means paying to be part of a fund since load charges are usually spent on paying the fund salesman. Load is charged in many ways by asset managers -- entry load, you pay when you buy a fund; exit load, you pay when you redeem your investment in a fund.
And the third is the Contingent Deferred Sales Charge (CDSC). This jargon means, a fund will hit you if you get out of a fund too soon. For instance, today if you redeem your investment in an income fund within 90-days of investment, you pay 0.5 percent of your investment. You stick beyond 90-days days; you pay nothing and get your full investment worth.
Typically an equity fund carries an entry load of 1.5 to 2% with no exit-load; bond funds are available on a no-load basis though most charge a CDSC, which has a different structure. Currently for bond funds, this time-linked load is normally in the range of 0.25 to 0.5%. The regulatory stipulation is that the charge cannot exceed 6 percent (excluding CDSC). And for CDSC, the time linked load cannot exceed more than 4% in the first year of the scheme, 3% in the second year of the scheme and so on. Thus, after the fourth year, the redemption fee cannot be more than 1%.
Anytime, entry and exit load, if avoidable, is good for investor. But the CDSC on most occasions is not bad, as it serves an important objective. It acts as a deterrent to an inflow of hot money into the fund when the going is good. Thus, it guards the interest on long-term investors in a fund, from the action of short-term investors. Investors, who put money into a fund only to pull it out too soon, can wreck havoc with the performance and impact the returns for dedicated investors.
For instance, if short-term investors press the sell button in bearish conditions, the fund manager will be forced to sell stocks or bonds in a falling market. Such distress sale might add to the losses. In the case of a bond fund, this could mean selling gilts and reducing the average maturity when the market is rallying since fund managers typically invest in government bonds to buy duration and liquidity.
CDSC matter most in a bond fund. As return from a bond funds come at a painstakingly slow pace and hence, a load of even 1% can significantly pull down an investors total return. That's why only CDSC is levied in a bond fund, to prevent inflow of hot money. The CDSC is a desirable load. It contributes to the stability of a fund in turbulent times. Still, if you don't want to pay a load, you can do one of three things: opt for a no-load fund (you have very few), hold the fund for longer than the minimum period in case of a CDSC, or just don't buy the fund in the first place!