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The market regulator Securities and exchange Board of India, SEBI, has recently abolished entry load on Indian Mutual funds if you invest directly. However, it is mandatory to pay an entry load of 2.25 per cent if you transact through intermediaries also called as agents or distributors. The distributors/agents are allowed to take this charge to service investors.
Investor has to be careful and aware of how this charge is levied since nobody asks you to pay this charge separately. Instead it is deducted up-front from your investable money right at inception.
What you have to do to avoid entry load is to invest directly in the Mutual funds without involving any broker/agent/distributor. You can do that by applying online through the web site of the Mutual Fund Company, in which you intend to invest. The only hurdle in this case is you should have account with Internet banking facility in the banks with whom your favorite Mutual Fund has tie-up for online payment. The other way to avoid entry load is to proceed to the Direct Mutual Fund Office of the AMC (Mutual fund Company) in which you intend to invest, and fill up the application having Broker/distributor column as “Direct”.
Suppose you are investing Rs 100 and NAV (the net asset value) of the scheme that you are buying is Rs 10. This NAV is multiplied by 1.0225 (2.25 per cent of Rs 10) to factor in the entry load and operative NAV for you becomes Rs 10.225 (Rs 10 as the actual NAV and Rs 0.225 as the entry load). The number of units allotted to you will be 9.78 and the money invested is Rs 97.8 instead of Rs 100. The remainder Rs 2.2 (100 less 97. 8) goes to the distributor and to meet other administrative expenses incurred by the mutual fund company. However, if you invest Rs 100 directly you will be allotted 10 units.
While you lose this money up-front, this charge literally multiplies. For example, even on a conservative basis, Indian equities can double in the next 5 years. Since 2.25 per cent has been deducted up-front and not been invested, what you have lost is 4.5 per cent (double of 2.25 per cent) from your returns.
Therefore, simple decision is that you should invest directly and not pay this significant charge, to take full advantage of this investor friendly move from SEBI