Entry and Exit Load and its Impact on NAV- Computation of Total Expense ratio

Entry and Exit Load and its Impact on NAV

Entry / Exit Load:

• Entry Load: (Note: Entry loads are currently prohibited in India by SEBI. However, for historical context and understanding) In the past, an entry load was a fee charged when an investor purchased units of a mutual fund. It was deducted from the investment amount before allocating units, effectively increasing the purchase price.
• Exit Load: An exit load is a fee charged when an investor redeems (sells) units of a mutual fund. It is deducted from the redemption proceeds, effectively reducing the amount received by the investor.
• Impact on NAV: Loads do not directly impact the NAV calculation itself. NAV reflects the market value of the fund's assets minus liabilities per unit.
• Impact on Investor Returns:
  • Entry Load (Historical): Reduced the initial investment amount available for growth, thus negatively impacting returns.
  • Exit Load: Reduces the redemption proceeds received, thus negatively impacting returns if units are redeemed before the specified period (if any).
• Sale Price, Re-purchase Price and Loads:
  • Sale Price (Purchase Price): In the past, for schemes with entry load, the sale price was higher than the NAV due to the entry load. The difference between the sale price and NAV was called the "entry load".
  • Re-purchase Price (Redemption Price): For schemes with exit load, the re-purchase price is lower than the NAV if an exit load is applicable.
  • Current Scenario (India): Entry loads are not permitted. Exit loads may still be applicable for certain schemes and are disclosed in the scheme documents.

Computation of Total Expense Ratio (TER)

Total Expense Ratio (TER):

• Definition: TER measures the total costs associated with managing and operating a mutual fund, expressed as a percentage of the fund's average assets under management (AUM).

• Components of Total Expenses:

  • Management Fees (Fund Management Charges)
  • Administrative Fees
  • Custodian Fees
  • Other Expenses (e.g., marketing, audit, legal)

• Formula for TER:

  TER = (Total Expenses / Average Net Assets) * 100
  

  Where:

  • Total Expenses = Management Fees + Administrative Fees + Custodian Fees + Other Expenses
  • Average Net Assets = (Beginning NAV + Ending NAV) / 2 (This is a simplified average. Actual calculation might involve daily or monthly averages as per regulations)

• Importance of TER:

  • Indicator of Cost Efficiency: A lower TER generally indicates a more cost-efficient fund.
  • Impact on Returns: TER directly reduces the returns for investors. Higher TER means a larger portion of the fund's earnings is used to cover expenses, leaving less for investors.
  • Regulatory Limits: SEBI in India sets limits on the maximum TER that mutual funds can charge, depending on the type of scheme and AUM.