How are entry and exit loads charged in SIPs?

FUND QUERIES

What are entry and exit loads and on what amount are they charged? What would happen if I invest Rs 100 and exit at Rs 120, if the entry and exit loads are 2.5 and 2 per cent, respectively? Please also tell me how these loads are charged when investments are through systematic investment plans (SIPs)?

Arvind Kumar Gupta

An amount is charged when a person purchases fund, which is called entry load. This amount is deducted from the initial investment. For example, if Rs 100 is invested in a fund having an entry load of 2.5 per cent, then Rs 2.50 is deducted from Rs 100 and Rs 97.50 will be invested in the fund. In the same manner, an amount is charged at the time of redemption from a fund known as exit load. Considering your example, if the invested amount of Rs 100 has grown to Rs 120 and the fund has an exit load of 2 per cent, then Rs 2.40 (2 per cent of 120) will be deducted at the time of redemption. Hence, the amount redeemed would be Rs 117.60. However, the exit load of various schemes may vary with the investment tenure and investment amount.

These loads (entry/exit) vary from scheme to scheme, but have to be within the limit prescribed by the market regulator, the Securities and Exchange Board of India (Sebi). You can save the entry load by investing directly through the AMC. The same rules govern the SIP model. In SIP, each instalment is taken as a new investment and, hence, you will be charged an entry load for it. However, some fund houses do not charge an entry load on SIP investments. I have invested in fixed maturity plans (FMPs) of a duration of more than one year. I have also incurred short-term capital loss from redemption of units of equity mutual funds in the current year. I wish to know if this short-term capital loss can be set off against my income from FMPs. If yes, will I be able to claim the indexation benefit on the FMP before setting off the short-term capital loss?

Nitin Aggarwal

According to income tax regulations, short-term capital loss can be set off against both short-term capital gain as well as long-term capital gain. So, you can avail yourself of this benefit to square off your losses. You can also take advantage of indexation on the gain on FMP to reduce your tax burden before setting off your short-term capital loss. If I want to have gold in my portfolio as a hedge against extreme crisis. Gold ETFs may not help much, if there is a national calamity and the government is in danger, Gold ETFs (as they are after all merely paper) may be difficult to encash.

Can you please confirm my above conclusion?

Sambaran Mitra

Investing in gold may be a good option to hedge against inflation and extreme crisis. It can be done in two ways. One can either hold gold in the physical form or can make investment in Gold ETFs. If you are over-cautious and always play on the safe side, it would then be better to keep physical gold, but you have to bear the risk of purity and safety of gold.

There is a possibility that due to national calamity or an extreme difficult condition of the economy, it may be difficult to liquidate Gold ETFs. But such an occurrence would be rare; you can enjoy the same benefits by investing in Gold ETFs without taking the risk of the quality and safety of the physical gold.

My query is related to the Taurus Liquid Fund. As this fund has a portfolio of all nationalised banks’ CDs, why is it still categorised by experts as a high-risk and low-return profile. On the other hand, Canara Robeco Liquid Fund has a very risky portfolio like NBFCs’ papers and yet considered among the low-risk and high-return profile.

Mahesh Kumar Kaushik

Value Research gives the fund's risk grade on the basis of its risk of loss and not on the basis of the instruments held by it in its portfolio. This refers to absolute losses and even periods when the fund underperforms a risk-free guaranteed investment like bank-term deposit.

To calculate a fund's risk, weekly fund returns are compared against the weekly risk-free return for debt funds. A risk-free return is defined as State Bank's 45-180 days’ term deposit rate.

The relative performance of the fund is expressed as a risk score and the risk score of Canara Robeco Liquid Fund is lower than that of Taurus Liquid Fund, while the return score of the former is higher than that of the latter. That's why Canara Robeco Liquid Fund has been given a low-risk and high-return grade, whereas Taurus Liquid Fund has a high-risk and low-return grade. I am a 30-year-old salaried person. Since the last three years, I have been investing in mutual funds regularly through the SIP route. I am a long-term investor and invest in mutual funds to build my retirement corpus and for my child's ( who is just two years old now) education and marriage. Even after investing for three years, I have incurred about 20 per cent net loss in my portfolio. Please suggest what strategy I should follow.

Vikalp Agrawal

Follow a simple strategy, invest in top-rated funds, keep a proper portfolio allocation between equity and debt (depending on individual needs and risk-bearing capacity), review and balance your portfolio at least once a year and invest regularly through the SIP route.

Considering your age profile and a huge corpus for your child's education, marriage and also for your retirement, it would be better to choose three or four top star-rated, well-diversified funds having a sound track record and remain invested for a long period. Shift to top-rated funds if the funds you have invested in do not perform compared to their peers. If you have a balanced and sound portfolio and are looking for a long-term investment, there is no need to worry about the market mayhem.

Value Research