Mutual funds are where a group of professionals work together and invest the funds of the people in wise manner so that the investor gets a good return. To float such funds the mutual fund company will he some expenses. To meet these expenses they charge some amount to the customers which are called as loads. There are two types of loads one is the entry load the other is the exit load. The entry load is collected from the investor when they buy the bonds. Similarly when they sell the bonds they charge the exit load.
The entry load is charged by the AMC that is the Asset management company when there is a new fund offer (NFO). This is charged so that they will be able to meet their expenses like advertisement or some other kind of preliminary investment. This entry load that is collected is not refundable. In case the fund is an open ended fund the asset management company can also charge the expenses that they have incurred as recurring expense.
The exit load is also charged by the asset management company when the investor wants to leave from the scheme. The percentage of the exit load may vary from time to time. The investor will have to pay a higher exit load if he wants to leave from the mutual fund but early. But then if he has invested for a longer duration the exit load will be lesser. The exit load depends a lot on the duration of the investment.
The SEBI that is the Securities and Exchange Board of India has totally abolished the entry load. Before this the mutual fund companies used to charge about 2.25% of entry load on the total value of the fund. Though the entry load is banned some distributors get little commission from the investors saying it s a commission for the fund house. So for this the Securities and Exchange Board of India has given a clause in the circular which states that there has to be transparency that is the distributor must tell the amount of commission that needs to be given to the fund house. So the investor has to be prudent and read the document carefully.
The Securities and Exchange Board of India has also set some guidelines for the exit load. It is also trying to reduce the exit load. The main aim of the Securities and Exchange Board of India is to protect the investor, mainly the retail or the small investors. So the first step that the Securities and Exchange Board of India took towards that is to abolish the entry load. So now the Securities and Exchange Board of India has come with a circular that an investor who invests more will not be charged a low exit load and an investor who does not invest a lot has to pay a high exit load.
Initially investors who invested anywhere from three to five crores did not have to pay exit load but this has been amended by the Securities and Exchange Board of India in its latest circular.
Given below is the what the Securities and Exchange Board of India has mentioned in its circular:
The circular number is SEBI/IMD/CIR No. 5/126096/08 which is dated 23.5.2008. As per the circular the format of the offer document has been simplified. Also the format of the Key Information Memorandum of the Mutual Funds Scheme is made very simple. According to this the mutual fund can charge an exit load of up to seven percent but they the charge has to be the same for all the investors.
There should not be any partiality shown. That is an investor who invests more should not be given a low or no exit load and a person who invests less should not pay more exit load. Whatever be the amount that is invested by the investor the exit load that is paid by then investor has to be the same.
Unit holders will not be charged different exit loads based on their subscriptions. Whatever be the subscription the exit load that the unit holders will be paying will be the same.
The entry or the exit load will differ from fund house to fund house. So one has to read the terms and conditions of a fund before entering into that fund.