The Hindu Business Line : Fund Talk

I have SIPs in four top-performing HDFC funds — HDFC Equity, HDFC Long Term Advantage, HDFC TaxSaver and HDFC Prudence. Recently they have started charging entry loads even for SIPs. Though I am continuing with them for the time being, I would like to know of some other good equity funds that do not have an entry load for SIP so that I can allocate some funds.

M .H. Nair

A number of funds have increased the up-front load or entry load from nil to 2.25 per cent over the past couple of years. Equity funds from the HDFC stable have increased the entry load from 1 per cent to 2.25 per cent effective June 1, 2006. The exit load has, however, been done away with in such funds barring HDFC Prudence, HDFC Top 200 and HDFC Core & Satellite. With this, the load structure of SIPs is at par with that of lump-sum investments.

Please note that the changed load will be applicable only for SIPs made on or after June 1, 2006. The new rates will not be applicable for SIPs that you started before the above date.

Coming to your question on top funds that do not charge an entry load, we feel the load structure should not be a deciding factor in your choice of equity funds. The issue is more relevant for a debt fund where a load can significantly cut into effective returns.

A load is a charge made by many asset management companies to meet their selling and distribution expenses on an ongoing basis. The load does slightly reduce your overall return, the reason being that you will be allotted less units when compared to a no-load structure. For example an investment of Rs 1,000 at an NAV of, say, 20 would have fetched you 50 units if there were no load. With a load of, say, 2.25 per cent, the units allotted to you would be reduced to 48.9 units (at load-added NAV of Rs 20.45).

Funds with a good track record do normally come with a relatively higher entry load. However, their ability to generate superior returns over a period of three to five years is likely to ensure that the load does not cause a dent in your overall returns. Further, an entry load is a one-time charge and if you are a long-term investor (you should be prepared to be one if you are investing in equity funds), the impact of the load on your returns is negligible.

Let us take an example of a SIP in one of the funds you hold, say HDFC Equity, to elucidate this.

As of May 31, 2006 a three-year SIP in HDFC Equity started in June 2003 would have returned about 48.52 per cent annually assuming a nil entry load. With an entry load of 1 per cent the same is reduced to 47.67 per cent and with a load of 2.25 per cent, the return comes to 46.64 per cent. The difference in return between a nil and 2.25 per cent load comes to about 200 basis points.

Let us now take the above SIP with a ten-year tenure. The annual return would be 38.5 per cent with a nil load, 38.3 per cent at 1 per cent load and 38.04 per cent with a load of 2.25 per cent. The difference in return between a no load structure and 2.25 per cent charge narrows to about 46 basis points as opposed to 200 basis points.

Thus, the impact of entry load is less pronounced over a longer time period. Even a 2 per cent difference appears insignificant compared to the returns delivered by the funds that you hold.

Top funds from other fund houses such as Franklin Templeton, Reliance Mutual and Magnum also have similar load structures now. That leaves you with very little choice in the top league. DSP ML Opportunities, however, has a 1 per cent entry load at present and also holds a good track record. Birla Sunlife Mutual has so far not charged entry load for SIPs. Birla Sunlife Equity is also one of our preferred picks from this fund house.

Having invested in funds with a good track record, we feel the load-factor should not bother you. If you want to diversify (as your SIPs are tilted to just one fund house), Kotak 30, Franklin Prima and Magnum Contra are good options.

Vidya Bala

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