Recently, the Securities and Exchange Board of India came out with the notification to waive entry load from the mutual fund schemes. The rule says if a mutual fund investment application is submitted directly to the asset management company at its office, then no entry load will be deducted from the investment amount.
This was much awaited in Indian investment scenario, as it will not only increase the resultant investment corpus of investors, but may also induce more investment. A boon to asset management companies too!
A loaded fund will always be two steps behind than an unloaded fund. A good way to think about load versus no-load mutual fund investing is to imagine a race track.
The no-load mutual fund gets to start on the regular start line (imagine a race track). The loaded mutual fund must start a number of strides back. Assuming both these funds travel at equal speeds, which fund will cross the finish line first?
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The answer is obvious-the no-load fund! When you pay a commission for the purchase of your fund, you automatically start off with a loss.
For example, if you start off by investing Rs 10,000, but you put it into a loaded fund with a 2 per cent front-end load, you are really only investing Rs 9,800.
What do you get for your Rs 200? Absolutely nothing. A salesperson might try to convince you otherwise, but actually there is no benefit compared to a no-load fund where all your hard earned Rs 10,000 would be put to work.
If these two funds are equally successful in the future, the load fund won’t ever catch up. In fact, because of compounding, it will fall farther and farther behind.
If the no-load earns a 10 per cent return in the first year, the load fund manager would have to earn at least 12.25 per cent on his portfolio just to get you even with that no-load fund, and with the increasing tenure this gap widens. The irony is that the load fund manager has no incentive to do that. He has no reason to care that you paid a commission. He simply sees you as a Rs 9,800 investor.
The load/commission is not going towards the management of the fund. The commission doesn’t buy you special privileges. Entry load on mutual fund scheme is a “money eater” at the inception and a burden on the investment to come at par with no load fund if not better.
There’s a big difference between these two types of funds. Sometimes it’s the difference between whether the investor makes money or whether a salesperson makes money.
Any investor investing his hard earned money in mutual fund schemes had to pay commission to the asset management companies upfront, which, in turn, is passed back to the distribution houses and agents for their services to the investors helping them to invest with them.
This initial cut would have been justifiable had the advice given by the agents was appropriate and on the basis of financial planning. But at most of the times this is merely an earning option of the investment advisors than heeding at the real need of the investors.
In advanced nations, like the US no-load funds are prevailing since long. This has enhanced the investment quantum and instigated the investment desire among the small-time investors as with no-load funds unscrupulous investment advisors makes an exit to pave a way for qualified financial planners, like certified financial planners (CFP), to advise the investors for a fee than for the pass back of the entry load from asset management companies in form of commission. With the fee charge, they tend to get unbiased and get responsible towards the investors for their right choice of investment. This usually would be on either specific investment plan or comprehensive financial planning.
The best advice:
Figure out what is really the right fund for you to own. Start with the asset allocation process to determine the best mix of investments for your situation.
Then ask yourself:
Does this fund fit within the plan I should have?
Does it have a good record?
Reputable management?
Reasonable fees?
In summary, the presence of a load is not a reason enough to sell or keep a fund. The decision depends on the details of the load, your own circumstances and needs, and the quality of the fund itself. A CFP can help you to do it. A CFP will construct an investment plan and will also weed out the chaff from your portfolio.
It’s too simple to say that all no-load funds are superior to all load funds. An investor is obviously better off in a top load fund than in a crummy no-load. But the right advice and direction to such top load fund is required. Globally, CFPs are most sought after for such well-informed and qualified advice.
This was much awaited in Indian investment scenario, as it will not only increase the resultant investment corpus of investors, but may also induce more investment. A boon to asset management companies too!
A loaded fund will always be two steps behind than an unloaded fund. A good way to think about load versus no-load mutual fund investing is to imagine a race track.
The no-load mutual fund gets to start on the regular start line (imagine a race track). The loaded mutual fund must start a number of strides back. Assuming both these funds travel at equal speeds, which fund will cross the finish line first?
• Check out our Yearender Special
The answer is obvious-the no-load fund! When you pay a commission for the purchase of your fund, you automatically start off with a loss.
For example, if you start off by investing Rs 10,000, but you put it into a loaded fund with a 2 per cent front-end load, you are really only investing Rs 9,800.
What do you get for your Rs 200? Absolutely nothing. A salesperson might try to convince you otherwise, but actually there is no benefit compared to a no-load fund where all your hard earned Rs 10,000 would be put to work.
If these two funds are equally successful in the future, the load fund won’t ever catch up. In fact, because of compounding, it will fall farther and farther behind.
If the no-load earns a 10 per cent return in the first year, the load fund manager would have to earn at least 12.25 per cent on his portfolio just to get you even with that no-load fund, and with the increasing tenure this gap widens. The irony is that the load fund manager has no incentive to do that. He has no reason to care that you paid a commission. He simply sees you as a Rs 9,800 investor.
The load/commission is not going towards the management of the fund. The commission doesn’t buy you special privileges. Entry load on mutual fund scheme is a “money eater” at the inception and a burden on the investment to come at par with no load fund if not better.
There’s a big difference between these two types of funds. Sometimes it’s the difference between whether the investor makes money or whether a salesperson makes money.
Any investor investing his hard earned money in mutual fund schemes had to pay commission to the asset management companies upfront, which, in turn, is passed back to the distribution houses and agents for their services to the investors helping them to invest with them.
This initial cut would have been justifiable had the advice given by the agents was appropriate and on the basis of financial planning. But at most of the times this is merely an earning option of the investment advisors than heeding at the real need of the investors.
In advanced nations, like the US no-load funds are prevailing since long. This has enhanced the investment quantum and instigated the investment desire among the small-time investors as with no-load funds unscrupulous investment advisors makes an exit to pave a way for qualified financial planners, like certified financial planners (CFP), to advise the investors for a fee than for the pass back of the entry load from asset management companies in form of commission. With the fee charge, they tend to get unbiased and get responsible towards the investors for their right choice of investment. This usually would be on either specific investment plan or comprehensive financial planning.
The best advice:
Figure out what is really the right fund for you to own. Start with the asset allocation process to determine the best mix of investments for your situation.
Then ask yourself:
Does this fund fit within the plan I should have?
Does it have a good record?
Reputable management?
Reasonable fees?
In summary, the presence of a load is not a reason enough to sell or keep a fund. The decision depends on the details of the load, your own circumstances and needs, and the quality of the fund itself. A CFP can help you to do it. A CFP will construct an investment plan and will also weed out the chaff from your portfolio.
It’s too simple to say that all no-load funds are superior to all load funds. An investor is obviously better off in a top load fund than in a crummy no-load. But the right advice and direction to such top load fund is required. Globally, CFPs are most sought after for such well-informed and qualified advice.
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