*Example 1 :*I invested Rs.1,00,000 in a fund XYZ. It charges an exit load of 2% but does not charge any entry load. Let us assume the fund gave returns of 18% for 20 years.

Net Amount Invested = Rs.1,00,000 (no entry load)

Rate of Return = 18%

Number of years invested = 20

Fund value after 20 years = Rs.27,39,303

*Exit Load*= 2% * Fund Value = 2% * 27,39,303 =

*Rs.54,786*

*Example 2 :*I invested Rs.1,00,000 in a fund ABC. It charges an entry load of 2% and does not charge any exit load. Let us assume the fund gave returns of 18% for 20 years.

*Entry Load*= 2% * 1,00,000 =

*Rs.2,000*

*Initial Interpretation :*At the first glance one will obviously think that entry load of Rs.2,000 is reasonable but an exit load of Rs.54,786 is expensive.

*The Bigger Picture*

Now lets take a look at the bigger picture and revisit the same examples.

*Example 1 :*I invested Rs.1,00,000 in a fund XYZ. It charges an exit load of 2% but does not charge any entry load. Let us assume the fund gave returns of 18% for 20 years.

Net Amount Invested = Rs.1,00,000 (no entry load)

Rate of Return = 18%

Number of years invested = 20

Fund value after 20 years = Rs.27,39,303

Exit Load = 2% * Fund Value = 2% * 27,39,303 = Rs.54,786

*Redemption Value*= Fund Value - Exit Load =

*Rs.26,84,517*

*Example 2 :*I invested Rs.1,00,000 in a fund ABC. It charges an entry load of 2% and does not charge any exit load. Let us assume the fund gave returns of 18% for 20 years.

Entry Load = 2% * 1,00,000 = Rs.2,000

Net Amount Invested = Investment - Entry Load = Rs.98,000

Rate of Return = 18%

of years invested = 20

Fund Value after 20 years = Rs.26,84,517

*Redemption Value*=

*Rs.26,84,517*(no exit load)

*The redemption value in both the cases are exactly the same. What this tells us is the impact of an entry load of 2% is equal to an exit load of 2%.*

*My Conclusion*

It is essential to look at the bigger picture to understand numbers related to investments. Like in our example an entry load of Rs.2,000 turned out to be equal to an exit load of Rs.54,786.

It is essential to look at the bigger picture to understand numbers related to investments. Like in our example an entry load of Rs.2,000 turned out to be equal to an exit load of Rs.54,786.

## 3 comments:

This was so intutive , I was overwhelmed .. I myself write on Mutual funds and other personal finance products , but never realised it . Its simple calculation but needs deep vision to understand it . Great article

Manish Chauhan

http://finance-and-investing.blogspot.com/

As expected from you, an excellent and interesting article.

Great work Raj. Keep it up

Srikanth Shankar Matrubai

goodfundadvisor.blogspot.com

Lets think about this from the perspective of Mutual Fund. Would they like 2,000 today vs. a hugh sum later? In net present value while the value is the same, the manager may have incentive to book revenue today.

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