Load-waived funds: Meaning, working and benefits

Imagine you have invested Rs. 1 lakh in mutual funds and pay 5% fees for buying them. In this case, your actual investment would be Rs. 95,000. Does it sound worrisome? Well, before investing your money in mutual funds, you must understand that sometimes mutual funds come with charges known as ‘loads’, which are fees paid when you buy or sell the fund. These fees are used to help investors or brokers who help manage your investment.

But there is a way around it. ‘Load-waived’ funds waive these fees partially. So, to enhance your knowledge in this regard, this article will explain what load-waived funds are, how they work and why they might be a smart choice for some investors. Let’s break it down.

• Table of contents

• Understanding load-waived funds
• Understanding load-waived funds with example
• Benefits of load-waived funds
• How do load-waived funds work?
• What are loads in mutual funds?
• No-load mutual funds – What are they?
• Load-waived funds vs no-load funds

Understanding load-waived funds

Load-waived funds are mutual funds that usually come with front-end or back-end fees, but these charges are waived under certain conditions. However, this doesn’t mean that an investor doesn’t have to pay any costs attached to this fund. Remember, it gives partial relief, not entire relief. You may still have to pay other fees, such as management fees or expense ratios. What you don’t have to pay is the one-time load fee that many investors usually pay when they buy certain mutual funds. This ensures you retain a greater portion of your returns.

Understanding load-waived funds with example

Imagine there is a mutual fund called ‘XYZ Growth Fund’ that usually comes with a 5% front-end load.

If you invest Rs. 1 lakh in this fund, Rs. 5,000 will go towards the load fee, and only Rs. 95,000 will be invested in the fund.

Now, suppose your financial advisor has an agreement with the fund company to waive the load. In that case, you can invest the full Rs. 1 lakh without paying the Rs. 5,000 load. This is now a load-waived fund in your case.

You still invest in the same fund with the same portfolio and management, but you save money upfront because the load fee has been waived. That extra amount remains invested, which can help grow your investment faster over time.

Read Also: Thematic Investment Funds: Meaning, Features & How To Invest

Benefits of load-waived funds

Cost savings

Of course when you don’t have to pay a certain amount as charges then more of your money goes into the actual investment.

Better returns over time

Thanks to the power of compounding your potential returns can be slightly higher over time as now you would be investing more.

Professional advice with lower costs

Since load-waived funds are purchased by an investment advisor, you can easily reap the benefit of his expertise for your investment.

Encourages investing

Knowing that the load is waived may encourage more people to start investing, as the entry cost is lower.

How do load-waived funds work?

Buying through a specific platform or brokerage

Some online platforms or brokerages have tie-ups with mutual fund companies to waive the loads for their customers.

Employer-sponsored plans

If you're investing through a retirement plan like an Employee Provident Fund (EPF) or 401(k)-type plan (in international contexts), the fund company may waive the load.

Financial advisors

If your advisor is affiliated with a firm that has a waiver agreement, you might benefit from load-waived options.

Read Also: What is mutual fund load - Meaning & Types

What are loads in mutual funds?

Entry load

An entry load is a fee charged when you first invest in a mutual fund. It’s also called a front-end load. This fee is taken out from your investment amount before the money is put into the fund. It usually covers distribution or marketing costs.

For example, if you invest Rs. 100 in a fund with a 2% entry load, Rs. 2 will be deducted as a fee and only Rs. 98 will be invested.

In India, entry loads were allowed up to 2.25% until 2009. After that, SEBI banned them, which impacted the earnings of mutual fund distributors.

Exit load

An exit load is a fee you pay when you withdraw or sell your mutual fund investment. It’s a percentage of the amount you redeem and is not part of the fund’s profits. These are also called back-end load funds.

For example, if you sell your investment worth Rs. 1 lakh and the exit load is 1%, you’ll be charged Rs. 1,000. You’ll receive Rs. 99,000 in hand.

No-load mutual funds – What are they?

Many investors prefer no-load mutual funds because they don’t charge any sales fee which means neither at the time of purchase nor at the time of sale. However, no-load doesn’t mean no fees at all. These funds still have expense ratios that cover management and operational costs.

Here are a few reasons why they appeal the investors.

Full investment of capital

Since you don’t have to pay entry and exit fees, your full investment goes into the fund. This further gets you more returns on your investment.

Lower expense ratios

No-load funds usually have lower running costs. While load funds charge extra to cover sales commissions. With no-load funds there are no such extra charges, so the cost to manage them is lower.

Ideal for self-directed investors

Since you don’t need to pay an advisor commission, you are independent make your own investment decisions.

Load-waived funds vs no-load funds

Load-waived funds

• Usually have a front-end load, but the fee is waived under specific conditions.
• Still technically considered load funds.
• Not available to everyone. It is usually available only through specific platforms, advisors or employer plans.

No-load funds

• Do not have any sales load.
• Available to all investors without needing a special agreement.
• Ideal for those investors who want to make their own decisions.

Conclusion

Load-waived funds offer opportunity for investors to access quality mutual funds without paying the usual front-end sales charges. While they are technically “load” funds, the fee is waived in certain situations.

Understanding the difference between load, no-load, and load-waived options is essential to making informed financial decisions.

FAQs:

What are load-waived funds?

Load-waived funds are mutual funds that usually charge a front-end sales fee but offer a waiver under certain conditions. These conditions may include investing through specific brokerages, retirement plans or advisors who have agreements with fund companies.

What is a load fee?

A load fee is a commission or charge that you pay when buying or selling a mutual fund. It compensates brokers or advisors who help sell the fund.

How do load-waived funds differ from no-load funds?

Load-waived funds are originally load funds but allow certain investors to skip the fee. While no-load funds never charge a sales fee and are available to all investors without special arrangements.

Who can access load-waived funds?

Load-waived funds are usually available to:

• Investors using specific online platforms or brokerages.
• People investing through employer-sponsored plans.
• Clients of advisors or institutions with waiver agreements.

What are the advantages of investing in load-waived funds?

• Avoiding the front-end load fee.
• More of your money gets invested.
• Relatively better returns due to higher initial investment.
• Access to premium mutual funds at a lower cost.
• Cost-effective way to work with professional advisors.

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