The asset management company (AMC) that manages your mutual fund has to spend on people, technology and infrastructure to generate returns. So it recovers part of this regular expenses from the investor. It is broken into two parts: annual management fee (up to 1.25 per cent for funds less than Rs 1 billion and one per cent for funds above Rs 1 billion) and entry & exit loads. Loads normally apply to only open-ended schemes. An entry load is also called the sales load, which is mainly to help the AMC recover expenses relating to sales literature, distribution, advertising and agent/broker commissions.
The price at which an investor buys into the fund is a function of both the NAV and sales load. For instance, if the fund’s NAV is Rs 12 and the applicable sales load is 6 per cent, your cost of entry is Rs 12.77 (12/(1-0.06)). If the investor applied for Rs 10,000 worth of units he would receive 783.085 units (10,000/12.77).
On the other hand, exit load (if you withdraw within a specified period) is charged while redeeming your units. The latter is for more logical reasons, especially with income or money market funds, where a quick withdrawal by too many investors can put pressure on the fund’s asset maturity profile. So to ensure that longer-term investors are not penalised, short-term investors are charged an exit load. But an exit load can also be applied by the AMC, if it wants to prevent unit holders from selling their units. This happens when the fund has done poorly against the benchmark index.
An established fund can also manipulate investor entry into a fund by charging or not charging a sales load. An AMC can charge a stiff entry load if it wants to prevent more investor from pouring money into its schemes. However, that rarely happens. More often, the AMC welcomes investors by advertisements screaming "no load" if invested within a certain time frame. Smart investors have to recognize this tactic used by an AMC.