This is regarding the loads charged by various asset management companies (AMCs). Are these charges actually utilised as fund income (and helps existing investors) or go as AMC income?
The loads are neither an income of the fund, nor of the asset management company. They are usually utilised to meet the selling and distribution expenses of the fund. Much of it is used to pay the sales commission of the distributors who sell the funds to you. Load can be charged in three different ways. First at the time of the entry into the fund by deducting a specified load amount from the initial investment. Such a load is called an entry load. For example, if Rs 100 is invested in a fund, which charges an entry load of 2 per cent, Rs 2 will be deducted and Rs 98 will be the amount actually invested. Load can also be charged at the time of redemption - called exit load. In this case the load amount is deducted from the redemption proceeds of the investor.
A third type of load is similar to the exit load. Here the load is charged depending on the duration of stay in the fund. Thus for example, if units are redeemed before six months, an exit load of 0.5 per cent is levied. This time-based exit load is called contingent deferred sales charge (CDSC).
The load structure varies from fund to fund. Regulations allow a fund to charge a maximum load of 6 per cent. In the initial days of the fund industry, this actually used to happen in case of equity funds. But this has come down significantly and these days, equity funds generally charge an entry load of 2.25 per cent.