Entry load: Front End Load vs: Entry Load: Key Differences Explained

1. Understanding Entry Load in Mutual Funds

When it comes to investing in mutual funds, one of the key aspects to consider is the load structure. Load refers to the fees or charges that investors have to pay when buying or selling mutual fund units. These charges are primarily of two types - entry load and exit load. In this section, we will focus on understanding entry load in mutual funds.

1. Definition of Entry Load: Entry load, also known as front-end load, is a fee charged to investors at the time of purchasing mutual fund units. It is deducted from the investment amount and reduces the number of units allotted to the investor. Entry load is expressed as a percentage of the investment amount and varies across different mutual fund schemes.

2. Purpose of Entry Load: The primary purpose of entry load is to cover the distribution expenses incurred by the mutual fund company. These expenses include commissions paid to distributors or agents who facilitate the sale of mutual fund units. Entry load helps the mutual fund company recover these costs and compensate the distributors for their services.

3. Impact on Investor Returns: Entry load directly affects the investor's returns. Since it is deducted from the investment amount, the investor receives fewer units for the same invested amount. As a result, the overall returns on the investment may be lower compared to a mutual fund scheme without an entry load. It is important for investors to consider the impact of entry load on their investment returns before making a decision.

4. Regulatory Changes: In recent years, there have been regulatory changes in various countries regarding entry load in mutual funds. Some countries have completely abolished entry load, while others have reduced it significantly. The aim of these changes is to make mutual fund investments more transparent and investor-friendly. Investors should stay updated with the regulations applicable in their respective countries to make informed investment decisions.

5. Example: Let's consider an investor who wants to invest $10,000 in a mutual fund scheme with an entry load of 2%. In this case, the entry load charged would be $200 (2% of $10,000). The investor would receive units worth $9,800 ($10,000 - $200) at the time of investment. If the mutual fund generates a return of 10% over a certain period, the investor's actual returns would be calculated on the invested amount of $9,800, reducing the overall returns.

6. Alternatives to Entry Load: In many countries, entry load has been replaced by other forms of charges, such as a transaction fee or a fixed fee. These alternatives aim to ensure that investors are not burdened with high upfront charges and can invest their desired amount without a reduction due to load. It is important for investors to understand the fee structure of the mutual fund scheme they are considering and choose the one that aligns with their investment goals.

Understanding entry load in mutual funds is crucial for investors to make informed investment decisions. By considering the impact of entry load on their returns and staying updated with regulatory changes, investors can choose the most suitable mutual fund scheme for their financial goals.

2. How Entry Load Affects Your Investment Returns?

One of the key factors that can significantly impact your investment returns is the entry load. Entry load refers to the fee charged by mutual funds or investment companies at the time of purchasing units or shares in a scheme. It is essentially a percentage of the total investment amount that is deducted upfront. While it may seem like a small percentage, it can have a substantial effect on your overall returns in the long run.

From the perspective of investors, entry load can be seen as an additional cost that reduces their initial investment and potential returns. Let's delve deeper into how entry load affects your investment returns:

1. Reduced investment amount: The primary impact of entry load is that it reduces the amount of money you actually invest in the scheme. For example, if you plan to invest $10,000 in a mutual fund with a 2% entry load, $200 will be deducted as a fee, leaving you with only $9,800 invested. This means your investment starts with a lower base, which can limit your potential returns.

2. Delayed breakeven point: Since entry load reduces your initial investment, it takes longer to recover the deducted amount and reach the breakeven point. The breakeven point is the point at which your investment gains equal the amount deducted as entry load. The longer it takes to reach this point, the longer it will take for your investment returns to start growing.

3. Impact on compounding: Compounding is a powerful concept in investing, where your returns generate additional returns over time. However, entry load can hinder the power of compounding. As the deducted amount is not invested, it does not have the opportunity to grow and compound over time. This can result in a significant loss of potential returns in the long term.

4. Higher return requirements: To compensate for the initial deduction due to entry load, you may need higher returns to achieve your investment goals. For instance, if you aim for a 10% annual return on your investment, you would actually need a 12% return to make up for a 2% entry load. This higher return requirement can make it more challenging to achieve your financial objectives.

5. Impact on exit load: Entry load and exit load are often interrelated. Exit load refers to the fee charged when you redeem or sell your units or shares in a scheme. In some cases, the entry load may be adjusted against the exit load, which means you may not have to pay an additional fee when you sell your investment. However, this also means that the impact of entry load persists throughout your investment journey, affecting both the initial investment and the eventual redemption.

To illustrate the effects of entry load, let's consider an example. Suppose you invested $50,000 in a mutual fund with a 2% entry load and an average annual return of 8% over a 10-year period. Without the entry load, your investment would have grown to approximately $109,366. However, due to the deduction of $1,000 as entry load, your final investment value would be around $107,366. This means the entry load cost you $2,000 in potential returns.

Entry load can have a significant impact on your investment returns. It reduces your initial investment amount, delays the breakeven point, hampers the power of compounding, and may require higher returns to achieve your financial goals. It is crucial to carefully consider the entry load and its implications before making investment decisions, as it can affect the overall performance and success of your investment portfolio.