Why you MUST not pay entry load

Dr Sanjiv Mehta

Background
SEBI in January 2008 abolished entry load on Indian equity funds if you invest directly. However, it is mandatory to pay an entry load of 2.25% if you transact through intermediaries.

How is it levied on the investor?
Investor has to be careful and aware of how this charge is levied since nobody asks you to pay this charge separately, instead it is deducted upfront from your investible money right at inception.

Suppose you are investing Rs. 100 and NAV (net asset value) is 10. This NAV is multiplied by 1.0225 to factor in load and operative NAV for you becomes 10.225. Number of units allocated to you therefore become 9.78 and the money invested is 97.8 instead of Rs. 100. If you invest directly then full Rs. 100 is invested and you hold 10 units.

Cascading effect of this cost
While you lose this money upfront, this charge literally multiplies. For example, even on a conservative basis, Indian equities can double in the next 5 years. Since 2.25 % has been deducted upfront and not been invested, what you have lost is 4.5% from your returns. Consequently it is a simple decision that you should invest directly and not pay this significant charge

New favourable development
Abolition of this load is leading to emergence of fee based wealth management advisories in India. Money, which you save through direct investment – just a fraction of that could be utilized to buy the services of such an advisory. They will facilitate your direct transactions in addition to host of other wealth management services.

Analysis of charges
On an average we are assuming that you are paying a rate of 0.4% of assets under management (AUM) annual fee to your advisor. Since timing of cash outflows is different, we will have to take time value of money into consideration. Paying 2.25% of upfront commission is equivalent to paying 0.4% of AUM every year for 13 years. In other words, what you are paying for 13 years, you lose in one single shot when somebody charges you 2.25% upfront.

Additionally, a transaction based company which has tasted blood by getting an upfront commission of 2.25% is likely to turn over your portfolio very soon and many times over even when not required. On the contrary, a fee based advisor wins only when you win and their interests are totally aligned with yours. Even when he reallocates, it is at zero cost to yours and at no advantage to such an advisor and therefore it will be done only when really required.

Conclusion & Recommendation
Consequently my strong recommendation will be to take full advantage of this gift and investor friendly move from SEBI, save lots of money and instead buy full services of a wealth management advisory at a small fraction of the cost.

Dr Sanjiv Mehta is the MD of Finance Doctor (www.financedoctor.in), a wealth management company and author of the highly acclaimed book, 'Winning The Wealth Game: Cricket Strategies For Financial Freedom'.