What is Mutual Fund Exit Load
Of late, mutual funds have gained massive popularity among all types of investors. They offer an excellent opportunity to earn inflation-beating returns on your investment without taking too many risks. Unlike stocks and securities, mutual funds are managed by a team of professional fund managers, and therefore, the risks associated with them are lesser.
Additionally, mutual funds provide high liquidity to investors. Apart from the Equity Linked Savings Scheme (ELSS), mutual funds do not have a lock-in period which means that you can redeem or exit your investments anytime you want. However, the Asset Management Company (AMC) may charge a nominal exit load on your investment for this.
In this article, you will learn what an exit load in a mutual fund is, how is it calculated for different types of funds, and why is it levied. Let’s get started.
What is a mutual fund exit load?
Mutual fund exit load is a fee that the fund house charges from its investors if they exit a mutual fund scheme partially or fully within a specific period from the investment date. In other words, the exit load is a penalty that an investor needs to pay to the fund house if they redeem their mutual fund units within a certain period of their purchase.
Not all mutual funds levy exit load on investors, and most often, this decision is at the discretion of the fund manager and the AMC.
Why is the exit load levied on mutual funds?
When you invest in an open-ended mutual fund, you have the option to exit your investment anytime you want. However, when you make an early exit, it may result in financial losses for the AMC. Therefore, they levy an exit load to discourage the investors from making pre-mature exits from the funds.
Sometimes, the investors exit their investments due to market fluctuations and emotional sentiments. The AMCs also levy exit loads to reduce the number of withdrawals due to such reasons as it can impact the long-term performance of their funds.
How to calculate exit load?
The exit load is expressed as a percentage of a mutual fund’s Net Asset Value (NAV). When an investor makes a pre-mature exit from a fund, the AMC deducts the exit load from their total investment value (as per the current NAV of that fund) and transfers the remaining amount to their bank account.
Let’s understand the calculation of the exit load with the help of an example:
Suppose an investor had invested Rs. 25,000 in a mutual fund scheme in January 2021. The scheme had an exit load of 1% if redeemed before one year of investment. The NAV of the fund was Rs. 50 at that time, which means that the investor has 500 units.
Now, if the investor wants to redeem his units in November 2021, i.e., ten months after his investment, he will be charged an exit load as per the following calculation:
Total amount invested in January 2021 = Rs. 25,000
NAV at the time of investment = Rs. 50
Number of units purchased = 25000 / 50, i.e., 500 units
NAV at the time of redemption = Rs. 60
Exit load = 1% of (60×500), i.e., Rs. 300
Final redemption amount = Rs. (30,000 – 300), i.e., Rs. 29,700
Exit load on different types of mutual funds
Exit loads are charged differently for different types of mutual funds. Moreover, not all mutual funds charge exit load. Let’s check exit loads for various types of funds:
- Liquid funds, such as overnight funds and ultra-short-term funds, do not charge any exit load from investors. They can redeem their investments anytime, and AMC credits the entire amount to their bank account.
- Debt funds may or may not charge an exit load. However, the period for which they charge this might be as low as a few weeks or a few months.
- Equity mutual funds charge the highest exit loads. It’s because these funds are meant for long-term investments. The rate of exit load for equity funds might range between 1 to 2 percent.
- In the case of SIPs, exit loads are the same for all types of mutual funds, It means that every SIP investment must complete a specific period (which is usually one year) to escape the exit load.
One thing that you need to note is that the exit load is not a part of the expense ratio of a mutual fund. It is a separate fee that the AMC charges if you exit its scheme within a specific period after investment. Therefore, always consider the exit load with its expense ratio while choosing a mutual fund scheme.
Also, try to remain invested in a mutual fund for as long as possible. This will not only prevent you from incurring any exit load but also help you gain maximum returns on your investment.