Load-waived funds are mutual funds that do not charge (waive) investors' load fees for buying and selling the mutual fund units. As mutual funds have gained popularity and have become one of the most invested-in investment instruments, it is important that investors know the charges and fees levied by mutual fund houses, which can lower their profit margin. Most mutual funds charge a load fee (front-end load) to investors as a sales charge, which they have to pay to the fund house when purchasing mutual fund units.
As it can lower the overall profit margin, the solution lies in load-waived funds, which levy no such charge on the investors. In this blog, you will understand the load-waived funds’ meaning and how they can help you decrease your overall mutual fund costs.
What are load-waived funds?
A load-waived fund’s meaning refers to a type of mutual fund scheme that does not levy any load fee on the investors at the time of buying and selling mutual fund units. Generally, mutual fund houses levy two types of load fees: front-end and back-end. The front-end load fee is levied when investors buy mutual fund units, while the back-end load fee is levied when they sell their mutual fund units.
Load-waived mutual funds do not require investors to pay the front or back-end load fee to compensate the financial advisor. It means that you can just buy or sell mutual fund units at any time and will have to pay only the cost price or receive the full sale proceeds without paying any fee. However, mutual fund houses limit the sale of load-waived funds and only make them available to certain investors.
Understanding load-waived funds with example
Mutual fund houses employ financial advisors who create specific investment strategies, offer investment or portfolio recommendations, and monitor the performance of the mutual funds to make adjustments. Mutual fund houses attach front and back-end load fees to ensure that the financial advisors are compensated for the work they do. However, when investors pay such a fee, it increases the overall costs and reduces their final profits.
For example, if a mutual fund has a front-end load of 5% and you invest Rs. 1,00,000 in it, you will have to pay Rs. 5,000 as the front-end load, and your final investment amount will be reduced by Rs. 5,000 to Rs. 95,000.
However, when you invest in a load-waived fund, no such fee is attached. Hence, if you invest Rs. 1,00,000 in a load-waived fund, your final invested amount will be the entire Rs. 1,00,000, without any levied fee.
Key takeaways
- Load-waived funds are a type of mutual fund that levy no front or back-end load fee on investors.
- The front-end load fee is charged when investors buy mutual fund units, while the back-end load fee is charged when they sell them.
- Load-waived funds are different from no-load funds as no-load funds do not charge any fees at all. Load-waived funds charge the basic 12b-1 fees levied for marketing and distribution.
- Load-waived funds carry ‘LW’ at the end of their name to create a distinction between them and other types of mutual funds.
Benefits of load-waived funds
Here are the benefits of load-waived funds:
1. Cost savings
Load-waived funds enable investors to invest large sums in mutual fund schemes since they do not impose front-end or back-end loads on the purchase or sale of mutual fund units. This guarantees that they will receive their full redemption amount and that it won't be reduced at the time of sale. Moreover, the absence of load charges can improve net returns by reducing overall investment costs.
2. Flexibility and liquidity
Load-waived funds help investors have greater flexibility in managing their mutual fund investments as they don’t have to incur any additional costs regarding load fees. Furthermore, the demand for load-waived funds is generally high, allowing investors greater liquidity as they can realise cash quickly when they sell their mutual funds and units.
3. Higher investment returns
Unlike mutual funds that carry load fees and reduce the overall profits, load-waived funds allow investors to invest and redeem the entire amount without any load charges. With a higher investment amount, the final redemption amount is also higher, increasing the investment returns when compared to mutual funds with load charges.
4. Accessibility
Load-waived funds are ideal for small risk-averse investors who might be discouraged by the high load charges levied in other mutual funds. As they start with a small investment amount, load-waived funds prove ideal as they allow them to invest and redeem the entire amount.
How do load-waived funds work?
Load-waived funds operate by eliminating the load fee, which is typically assessed when investors purchase and sell mutual fund units to pay the financial advisor a commission or sales fee. Investing in load-waived funds allows investors to transfer money into the fund without incurring any upfront or redemption load costs. Consequently, all of the investor's cash is invested in the underlying assets of the funds, and the entire amount invested is compounded to compute the final return.
Long-term savings can be substantial for investors in these funds because there are no sales fees. This cost-cutting measure guarantees that compounding generates larger earnings and increases overall returns on investment. Furthermore, load-waived funds also offer higher liquidity, and investors can sell them quickly to realise cash.
What are loads in mutual funds?
In mutual funds, loads are fees levied as a sales charge or commission that investors must pay when they buy or sell mutual fund units. These load charges are levied to compensate the brokers and the financial advisors for their role in creating, managing, and distributing mutual fund units.
There are two types of loads in mutual funds:
- Front-end load: A front-end load is a fee paid by investors when they buy mutual fund units. It is deducted from the initial investment amount, and the deducted amount goes directly to the broker or financial advisor.
- Back-end load: A back-end load is a fee paid by investors when they sell mutual fund units. Similar to the front-end load, the amount is deducted from the sale proceeds and goes directly to the broker or financial advisor.
Why buy no-load mutual funds?
No-load mutual funds are slightly different from load-waived mutual funds as they do not charge any fee whatsoever from the investors. Although load-waived mutual funds waive the front and back-end load fees, they do charge the annual 12b-1 fee, which is paid to the fund house to increase the customer base through marketing the fund.
However, no-load mutual funds do not charge the load fee or the 12b-1 fee, which further increases the return potential and flexibility for investors. Hence, no-load mutual funds are ideal for small investors who do not want to invest a high amount. As they do not charge any fees, they prove cost-effective for small and risk-averse investors.
Load-waived funds vs. No-load funds
In most cases, load-waived funds and no-load funds are used interchangeably. However, both funds differ slightly in their features. Here is the difference between load-waived funds and no-load funds:
1. Fee structure
Load-waived funds only waived the front and back-end load fees levied on investors while buying and selling mutual funds. On the other hand, no-load funds do not charge any fee, including the 12b-1 fee.
2. Identifier
Load-waived funds have ‘LW’ at the end of their names, assisting investors to identify them easily. However, no-load mutual funds do not have any such identifier in their names.
3. Accessibility
Load-waived mutual funds are not easily accessible and require investors to consult a financial advisor for investing in such funds. In contrast, investors can buy no-load mutual funds directly from a brokerage firm or the mutual fund company.
4. Returns
Although load-waived funds do not charge load fees, they still charge marketing and distribution fees through the 12b-1 fee, reducing gains in comparison to the no-load funds since they do not charge any fees.
Conclusion
Load-waived funds are mutual funds that do not charge load fees, such as front- and back-end load fees. These funds offer higher returns for investors compared to funds with load fees. You can find a financial advisor to invest in such funds and ensure that your capital amount is entirely invested for better returns. Now that you know what load-waived funds are, you can better invest in mutual fund schemes.
If you are considering investing in mutual funds, you can visit the Bajaj Finserv Mutual Fund Platform. It contains unique tools, such as a mutual fund calculator, which can help you compare mutual funds and invest in the most suitable mutual fund schemes.
