The Securities and Exchange Board of India (SEBI) has finally scrapped loads (entry as well as exit) charged by mutual funds on bonus units and units allotted on reinvestment of dividend, with effect from April 1.  

The move is based on recommendations from AMFI’s Working Group on Standardization of Key Operational Areas.

An entry load is charged when an investor enters a mutual fund scheme. For redemptions made thereafter, investors are charged an exit load by the fund house.  However, the fund manager sometimes converts earnings from the scheme into units and distributes them as bonus units to the investors.  These bonus units are then charged entry load and exit load.

The logical argument made against charging such loads is that it is investor’s money that has contributed to the earnings and that investors are not entering the scheme afresh, so charging an entry load does not make any sense.  

On the other hand, in the case of the dividend reinvestment option, the investor is assigned units for dividend that is re-invested in the scheme.