Entry load

Open-ended schemes sell new units to investors (a sale transaction) and buy units back (a re-purchase transaction). Both happen at prices set off the NAV.

In the past, schemes were allowed to keep the sale price higher than the NAV. The difference was the entry load — a charge for coming in. The money collected as loads was available to the AMC to meet selling expenses, limits were liberal, and schemes could even charge different classes of investors different loads within the same scheme.

That world is gone. SEBI has banned entry loads. The sale price must now be the same as the NAV, subject only to applicable stamp duty. The only load that survives is the exit load on the way out — and even that is no longer the AMC's to keep: it must be credited back to the scheme.

The term matters for the exam because questions still ask how an entry load worked, how it affected the investor's return, and whether it exists today.

The workbook's illustration: with an NAV of Rs 11.00 and an entry load of 1 per cent, the sale price would have been Rs 11 + 1% of Rs 11 = Rs 11.11. Today the sale price is simply Rs 11.00.

Compare the two loads:

The current position on loads in full:

• Entry load banned; sale price = NAV (subject to stamp duty).
• No distinction among unitholders based on the amount of subscription while charging exit load; any new or higher load applies only to prospective investments.
• No exit load on bonus units or units allotted on reinvestment of dividend.
• Exit loads are credited back to the scheme immediately.

The ban flows through to every allotment calculation. In an NFO, units are sold at the face value of Rs 10. In an ongoing offer, units = amount ÷ NAV: the workbook's investor putting Rs 12,000 into a scheme with a sale price of Rs 12 receives 1,000 units.

When computing investor returns rather than scheme returns, the workbook uses the price actually paid — NAV plus entry load, if any — as the starting value. With the ban, that adjustment now matters only for exit load, and for returns measured over periods when entry loads still existed.

An investor puts Rs 1,00,000 into an equity scheme at an NAV of Rs 20.

Under the old regime the investor was Rs 1,961 behind the moment the units were allotted. Today the only deduction is Rs 5 of stamp duty.

The workbook shows the same drag on returns. In its CAGR example the investor bought at an NAV of Rs 10. Had a 2 per cent entry load applied, the units would have cost Rs 10.20, so the investor's return would be lower than the scheme's. Add a 1 per cent exit load on a closing NAV of Rs 15, and the investor receives Rs 14.85 rather than Rs 15. Loads, the workbook concludes, drag the investor's return below the scheme return — and advertised scheme returns do not factor them in.

Chapter 7 (Net Asset Value, Total Expense Ratio and Pricing of Units), section 7.4, defines entry and exit load with the Rs 11.00 illustrations and sets out the current position. Chapter 9, section 9.4, applies the ban to NFO and ongoing-offer allotments, and Chapter 10, section 10.4, uses loads to separate scheme returns from investor returns. Expect a question on the sale price today, a computation of units allotted, and a statement-type question on what happens to exit load money.

• Entry load is banned; exit load is not. An option saying "both loads are banned" is wrong.
• Sale price = NAV, subject only to stamp duty. There is no mark-up on purchase.
• Entry load raised the sale price; exit load lowers the re-purchase price. Rs 11.11 versus Rs 10.89 on an NAV of Rs 11.
• NFO units are sold at face value, Rs 10 — because there is no entry load to add.
• Exit load now goes back to the scheme, not to the AMC for selling expenses.
• No load on bonus units or dividend-reinvestment units.
• Published scheme returns ignore loads; investor returns must account for them.