Entry Load and Exit Load: What Remains and What Does Not

A load is a charge on a holder's own transaction rather than on the scheme. An entry load would come off money going in, so the same rupees buy fewer units. An exit load comes off money going out, so the same units pay less cash. Which loads may be charged, and any ceiling on them, is set by the Securities and Exchange Board of India (SEBI) and published at sebi.gov.in.

Girnar Asset Management Limited, an invented asset manager, runs the Girnar Large Cap Equity Fund, an open ended equity scheme with net assets of Rs 4,200 crore and 120.00 crore units outstanding. Divide the first by the second. Rs 4,200 crore over 120.00 crore units makes one unit worth Rs 35.00 exactly. The scheme carries an expense ratioThe charge that runs against a scheme's own assets every day, expressed as a percentage of those assets for a year. of 1.65 per cent a year.

The scheme's four figures are the whole toolkit. From them follow what a load is and what it is not, what a charge on the way in does to a unit count, what a charge on the way out does to a bank credit, where the money a load takes actually sits afterwards, and how a one off charge converts into days of the charge that runs every day, so that two costs of completely different shapes can finally be set beside each other.

What is a load on a mutual fund scheme?

A load is a charge that attaches to something a holder does. The transaction triggers it, the transaction sizes it, and the person who made the transaction pays it. Nobody else in the scheme pays it and nobody else in the scheme even notices it happened. Attaching to one person's own transaction separates a load from every other charge on a scheme, and the separation is worth fixing before anything else.

Set it against the other charge. The expense ratio runs against the scheme's own assets, every single day, whether anybody transacted or not. The expense ratio lands on everyone holding units that day, in exact proportion to what they hold. A holder who opened a folioThe account in which one holder's units in one scheme are recorded. four years ago, has not touched it since, and has no intention of touching it this year still paid it today. A load needs an event to exist and the expense ratio needs nothing at all. The two are different kinds of charge, not different sizes of one. What that daily charge covers and how it is assembled is set out under how a scheme's total expense ratio is put together. The rate alone is what the arithmetic that follows needs.

Here is the everyday version. A gym charges a joining fee and a monthly fee. The joining fee happens because one member walked in and signed something, once, and the person on the treadmill beside them did not pay it this morning. The monthly fee happens because time passed, and it happened to every member whether they came in or not. Loads are joining and leaving fees. The expense ratio is the monthly fee, except that nobody sends a bill for it.

Entry Load: what would a charge on money coming in do to the units?

An entry loadA charge taken from money going in, before units are created, so the same amount of money buys fewer of them. is taken from the money before any units exist. The order is what matters. Money arrives, the charge comes off the money, and only the remainder is divided by the value of one unit to decide how many units get created. AllotmentThe moment units are credited to a holder's folio against money the scheme has received. happens last, on a smaller number.

The arithmetic runs on the Girnar Large Cap Equity Fund. A holder sends Rs 1,00,000/- when a unit is worth Rs 35.00. With nothing deducted, Rs 1,00,000/- divided by Rs 35.00 gives 2,857.143 units, rounded to three decimals in the way an allotment record carries them. Taking 1.00 per cent off first, one per cent of Rs 1,00,000/- is Rs 1,000/-, leaving Rs 99,000/-, and Rs 99,000/- divided by Rs 35.00 gives 2,828.571 units. The two allotment records differ by 28.572 units. Dividing the Rs 1,000/- deducted straight by Rs 35.00 gives 28.571 units instead; the third decimal is the rounding at each allotment and nothing more, and it is worth noticing once so that it is never chased.

The holder is not shown a smaller amount of money, only a smaller number of units, so an entry load never appears as a deduction anywhere. That is the whole trick of it. There is no line on any record saying Rs 1,000/- was taken. There is a folio saying 2,828.571 units, and no reason at all for the holder to know that the undeducted arithmetic would have said 2,857.143. A charge that arrives as an absence is a charge nobody notices. The way in is treated differently from the way out for precisely that reason.

Exit Load: what does a charge on money going out do to the cash?

An exit loadA charge taken from money going out, after the units have been valued, so the same units pay less cash. reverses the order, and the reversal is the entire lesson. On a redemptionThe moment units are cancelled and money is paid back to the holder. the units are counted first, then valued, and only then is the charge computed. The charge is computed on the value, not on the units, and it comes out of the payment.

Work it on the same scheme. A holder redeems 2,857.143 units when one unit is worth Rs 35.00. Multiply: 2,857.143 times Rs 35.00 is Rs 1,00,000.005. The half paisa left by the three decimal unit record rounds away, and the gross amount is Rs 1,00,000/-. Take 1.00 per cent of that gross amount. The deduction is Rs 1,000/-, and Rs 99,000/- reaches the bank account. The folio, meanwhile, records 2,857.143 units cancelled, the full number redeemed.

The units are valued first and the charge comes off the value, so a charge on the way out never touches the unit count and always touches the cash. The redemption side is the mirror of the entry side, and it produces the opposite visibility. Here the holder was told Rs 1,00,000/- was the gross amount, was told Rs 1,000/- was deducted, and saw Rs 99,000/- arrive. Three numbers, all of them stated, all of them checkable by anybody who can multiply. A charge stated in three checkable numbers is the charge people know about.

Where does the money a load takes actually go?

Where the money goes is the question almost nobody asks, and it has two completely different answers depending on one structural fact. The rupees deducted are real rupees and they land somewhere. Where they land decides whether the charge was a transfer between people inside the scheme or a cost that left the scheme entirely.

Structure one: the money is retained inside the scheme. The Rs 1,000/- comes off the leaving holder's payment and goes into the scheme's own assets, where it now belongs to everybody who stayed. Net assets go up by Rs 1,000/- and the units outstanding go down by the ones cancelled, so the value of one unit is very slightly higher than it would have been. Nobody sees this happen either; it arrives as a fraction of a paisa on the value of a unit. The retained charge is a transfer from the person leaving to the people staying.

Structure two: the money leaves the pool. The Rs 1,000/- comes off the payment and goes out of the scheme to somebody outside it. Net assets are unchanged, the value of a unit is unchanged, and the holders who stayed recover nothing at all. To everybody remaining in the scheme, that money simply left the building.

To the holder paying, the two structures look identical, and to everybody who stays they are opposites. Same deduction, same statement, same rupee figure, and in one case the remaining holders are compensated and in the other they are not. Which structure applies to any Indian scheme is set by SEBI and is published at sebi.gov.in. Holding the two structures apart lets the actual rule be read for what it is.

Why would a scheme charge anything on the way out at all?

Because money leaving is not free for the people who did not leave. When a holder redeems, the scheme has to find the cash. If the scheme does not happen to be holding enough, it sells something, and selling has a dealing costWhat it costs a scheme to buy or sell securities: brokerage, taxes on the transaction, and the price movement caused by trading itself. attached: brokerage, transaction taxes and the price the market gives a seller who has to sell today rather than one who can wait. The dealing cost lands on the scheme's assets, and therefore on everybody still holding units. The holder who left has already been paid.

Here is the everyday version, and it is worth sitting with. A wedding caterer takes a booking for a hundred people, buys the vegetables, hires the extra hands and rents the pans. The day before, forty guests drop out. The money is already spent. The deposit the caterer collected at the booking is not a punishment for changing plans and is not a moral judgment on the household that changed them. The deposit answers one question: who carries a cost that has already happened. A charge on a quick exit is not a penalty, it is a decision about who pays for the dealing that the exit forces.

The same reasoning explains why such a charge is usually attached to a short period rather than to every redemption forever. A holder who has been in the scheme for years has been on the paying side of other people's exits many times over. A holder who arrives and leaves quickly has used the scheme's dealing capacity and contributed almost nothing to it. Whether any of that reasoning is reflected in the rules that actually apply in India is a question for SEBI at sebi.gov.in.

How is a load different from the charge that runs every day?

Two charges of incompatible shapes are now in hand. One is an event, measured in rupees, that happens once. The other is a rate, measured per year, that happens continuously. The two cannot be compared until both sit on one scale, and the cleanest scale is time: how many days of the daily charge does the one off charge equal?

The accrualAn amount recognised as owed and set against a scheme's assets before the value of one unit is struck for the day. arithmetic is small enough to do in the head. The Girnar Large Cap Equity Fund's expense ratio of 1.65 per cent a year, applied to Rs 1,00,000/-, is Rs 1,650/- across a year. Dividing by 365 gives a daily amount of about Rs 4.52. A one off charge of Rs 1,000/- divided by Rs 4.52 comes to about 221 days. The faster route is dividing 365 by 1.65. The answer is 221.2, so each 1.00 percentage point of load is worth about 221 days of a 1.65 per cent expense ratio on the same amount of money.

Read what that says. A charge of 1.00 per cent to leave, paid once, visible, complained about, is the same money as seven and a bit months of a charge nobody ever sees. Stretch the holding to three years and the daily charge has taken Rs 4,950/- on that Rs 1,00,000/- while the one off charge is still Rs 1,000/-. The charge a holder pays once and can see is routinely smaller than the charge they never see at all. Nothing about that is a scandal and nothing about it is anybody's fault; it is a straightforward consequence of one charge being an event and the other being a rate.

How long does a charge on the way out apply, and who fixes that?

A charge of this kind applies to units redeemed within a stated period of allotment, and to nothing redeemed after it. The shape is what people get wrong. Holders picture a taper, something that fades gradually the longer a holder stays, the way a mobile contract might. A load period is not a taper. A load period is a step. The charge is fully on for a redemption on the last day of the period and fully off for a redemption on the next day, and the day in between is worth the whole of it.

Two things follow. The first is that on a large redemption the difference between two adjacent days can be a genuinely large number. A redemption date is worth looking at before it is chosen rather than after. The second is that the period is counted from allotment, unit by unit, so a folio built up over many months contains units of many different ages and a partial redemption has to be worked out against the specific units it touches rather than against the folio as a whole.

The period and the rate are the scheme's own terms, set out in the scheme's own documents, and they differ from one scheme to another. The case record for the Girnar Large Cap Equity Fund carries neither one. Any ceiling on what may be charged, and any condition on how it may be applied, is SEBI's and sits at sebi.gov.in.

What does a charge on the way out come to in rupees?

The whole thing now goes onto one sheet of arithmetic. The case record for the Girnar Large Cap Equity Fund carries no rate and no period, so the table below runs a range of rates instead, and every one of them is arithmetic. The redemption is fixed: 2,857.143 units at a net asset valueThe value of one unit of a scheme, computed after the day's accruals are set against the assets. of Rs 35.00. The multiplication gives Rs 1,00,000.005, and the gross amount settles at Rs 1,00,000/-.

What a scheme charges, and any ceiling on it, are terms of that scheme and of the rules rather than products of arithmetic, so the four rates above stand for the shape of the arithmetic and for nothing more. Down the last column, the point arrives on its own. Every rate in the visible column converts to something under a year of the invisible charge. The last row, the one nobody was ever shown, is larger than all of them.

Why do holders argue about the smaller charge?

Put the two charges beside each other one last time and notice what happened to each of them on the way to the holder. The charge on the way out was computed on a screen, printed on a statement, and stated in rupees at the moment of the transaction. The charge that runs every day was set against the scheme's assets before the value of a unit was struck. By the time anybody saw the Rs 35.00, that charge was already inside it. There is no line to find, and a holder who goes looking for one on a statement will not find it.

The charge people compare is the one they can see, and on any holding of more than about seven months it is the smaller of the two. The comparison is a fact about attention rather than an accusation against anyone. Nobody hid anything. The daily charge is disclosed, published and available; it is simply not displayed at the moment a holder is deciding anything, and a number that is not on the screen does not enter the comparison being made on that screen.

The household version is a rented flat. The deposit is a number everybody negotiates hard because it is stated once, in bold, at the start. The monthly maintenance charge gets a shrug, and over a three year tenancy it is many times the deposit. Same shape, same reason: one arrives as an event and the other arrives as a rate.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.