Load vs. No-load Mutual Funds - What's the Difference?

Whenever we invest in mutual funds, we’re bound to see terms like entry load, exit load and expense ratio. If we don’t know what these are and directly invest in a mutual fund, we might lose a part of our profits.Often, we also see that after redeeming our mutual funds, the money credited in our account is slightly less than our fund value. This is because the exit load has been deducted. Let us understand what an entry or exit load is, what is an expense ratio, and the difference between load funds and no-load mutual funds.

All mutual funds are usually operated by the company managing the fund, or a third party investment broker or intermediary. There is marketing, distribution, and additional management required to properly maintain the funds and all this incurs a cost to the Asset Management Company or AMC.This is why when an investor wants to invest in a mutual fund, the AMC charges the investor a small percentage of their invested amount as a ‘load’. This can either be an entry load, that is a fee charged when an investor starts investing, or an exit load, a fee charged when an investor exits the mutual fund. All these charges are categorised under ‘Expense Ratio’ of the particular fund.Currently, SEBI has discontinued the practice of charging an entry load, that is no fee can be charged when an investor starts investing. The exit load is still applicable when someone wants to exit a mutual fund and it is charged to discourage the investor to exit the fund.

Thus, when a mutual fund management company charges for sale of fund units, in other words, when it charges an exit load, such a fund is termed as a load fund. Usually a load fund has a higher expense ratio than a No Load fund because the fund is managed or distributed by a third party rather than the fund house itself.

In cases where the fund house itself is managing their mutual funds, they do not charge a fee for sale of units. Such funds are termed as no load funds.It must be noted, however, that a no load fund does not have zero expense ratio. Only the charges for the sale of fund units are not applicable, the rest of the management charges still apply. But this deduction makes the overall expense ratio of a no load fund to decrease significantly.That is why when you look at the expense ratio for a mutual fund that is being sold directly, you’ll find that the expense ratio is quite lower than that of a regular fund being sold by a third party or broker.

No Load Funds Are Cost Effective

Since the overall expense ratio of a no load fund is quite low, investing in them is cost effective for investors. When the investor exits the fund, no commission for sale of units is charged and only the management expenses are charged. Thus, the investor gets returns that are more cost effective when compared to load funds.

In no load mutual funds, the entire amount that you invested, including the returns are reinvested by the fund house. This is because there is no additional charge that the fund house incurs to any broker or intermediary. Thus, your entire investment is working in your favour.You’re Not Dependent On An Investment Broker Or Agent:In a direct mutual fund, you do not have to rely on an agent for your investment requirements. You can do your own research and decide where you want to invest, all on your own.

At first glance, no load funds might seem more attractive due to the very low expense ratio that they charge. But one must also understand that a no load fund will not come with investment advice that a broker or agent might bring with them in a load fund. It is true that many load funds have given better returns than no load funds, and vice versa. To conclude, whether a fund is a load fund or a no load fund must not be the sole criteria for investing. You should look at the track record and stability of the fund and then decide whether you want to invest in a load fund or a no load fund.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.