What Is Exit Load In Mutual Funds: “Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.” This is a disclaimer that many of us have come across whenever we watch an advertisement related to mutual funds on television. This disclaimer aims to tell us that past performance is not necessarily indicative of the future performance of the schemes and that the value of the fund may fluctuate, depending on the market. It tells investors to make well-informed decisions related to their investments.
One of the things that investors should read in the fine print of scheme-related documents is about the exit load. In this article, we’ll understand what is exit load in mutual funds and the reason why it is charged. Then, we’ll see how to calculate the exit load on lumpsum and SIP investments and know the charges for different types of schemes. Keep reading to find out!
What is exit load?
Mutual Funds are a pool of investments drawn from various investors having the same investment objective. This pool of money is managed by fund managers who are appointed by asset management companies (AMC). AMCs charge a fee called an exit load when investors exit or redeem their investments. This fee is different from the expense ratio.
Why do mutual funds charge an exit load?
An exit load is charged by AMCs to discourage investors from redeeming their investments. This is particularly charged when investors pull out their investments before the expiry of the specified period of investment in the scheme. Please note that investors cannot make premature withdrawals from funds that have a lock-in period.
This fee reduces the number of withdrawals as the exit load directly eats into the overall returns of all the investors at the time of redemption. In addition, it protects other investors who are invested in the fund from the impact cost arising due to early liquidation of investments due to redemption. The exit load charged from investors is credited to the mutual fund scheme itself. It does not form a part of the fund house’s profit.
Exit load differs from fund house to fund house and from scheme to scheme. Not all funds levy an exit load on investors. Therefore, it is important to keep the exit load aspect in mind while choosing a plan to invest in. Mutual funds cannot charge any exit load beyond the levels specified in the scheme-related documents.
If they change exit load provisions, such changes can happen only prospectively, i.e., they do not apply to the existing investments.
How to calculate exit load?
We understood what is exit load in mutual funds. Let’s take a look at how it is calculated. Exit load in mutual funds is generally a percentage of the Net Asset Value (NAV) of the mutual funds an investor possesses.
The Net Asset Value is the net value of the mutual fund’s assets minus the value of its liabilities. In general, AMCs deduct the exit load from the total NAV and credit the remaining amount to the investor’s account.
For example, the exit load levied on a one-year scheme is 2% and is redeemed within 4 months, which is before the agreed period. If the NAV of the fund is ₹ 50 during the time of redemption, the exit load charged will be 2% of ₹ 50 which is ₹ 1 per unit.
The NAV according to which the redemption will happen will be ₹ 49(₹ 50 – ₹ 1). If the investor remains invested for the agreed tenure, then he/she will not have to pay an exit load.
Let’s say Mr. A has invested a lumpsum of ₹ 40,000 in the above mutual fund scheme. This amount was invested in February 2022, and he wants to redeem his investment in June 2022, i.e., after 4 months. In this case, the exit load will be paid as per the following calculation:
|Amount invested in January 2022||₹ 40,000|
|NAV at the time of investment||₹ 40|
|Units bought||40000/40 = 1,000|
|NAV at the time of redemption||₹ 50|
|Exit load||2% of (50*1000) = ₹ 1,000|
|Final Redemption Amount||₹ 50000 – ₹ 1000 = ₹ 49,000 Or ₹ 49 * 1000 units = ₹ 49000|
How to calculate exit load on SIPs (Systematic Investment Plans)
In the case of SIPs (Systematic Investment Plans), FIFO or the first-in first-out concept is applied. It is assumed that the earliest SIP installment is redeemed first and the holding period and exit load are calculated accordingly.
For example, Let’s say that Mr. A started a SIP of ₹ 10,000 in an equity mutual fund scheme in January 2022, with an exit load of 1% before 12 months. If he wants to redeem the units in July 2022, the exit load will be calculated as follows:
|Month||Amount Invested (₹)||NAV (₹)||Units Bought||NAV in July 2022 (₹)||Value of Investment (₹)||Exit Load @1% (₹)|
The total amount invested is ₹ 60,000. At the time of redemption, the investor will receive ₹ 72236.11, i.e., ₹ 72965.77 – 729.66.
If Mr. A redeems his investment in January 2023, he will not have to pay any exit load on ₹ 10000 invested in January 2022, as that month’s investment has already been completed a year. For the remaining installments, the calculation will happen as indicated above.
Exit load on different mutual fund schemes
The exit load differs from scheme to scheme and fund house to fund house. Some mutual fund schemes may levy an exit load for investment up to a period of two years, while others might levy it for seven days only and a few others might not levy it at all. Here’s how they work, in general:
- No exit load is charged on overnight schemes.
- Liquid funds may charge a graded exit load if the investment period is less than seven days. The exit load decreases as the holding period increases.
- Debt funds levy exit load when the period of redemption ranges from one month to one year.
- Equity mutual funds usually levy a heavy exit load on redemptions if the holding period is up to two years.
In this article, we understood what is exit load in mutual fund schemes. Then, we took a look at two examples for the calculation of exit load. Moreover, we understood why mutual funds charge an exit load and got to know the charges for different types of mutual funds.
It is important to know that some mutual funds might provide excellent returns that outdo the exit load and expenses that investors incur. A little calculation goes a long way in making massive returns. That’s all for this article folks. We hope to see you around and happy investing until next time!
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Hey, there! Thank you for stopping by 🙂 Simran is a master graduate in commerce from Bangalore University, an NSE-certified Fundamental Analyst and a NISM-certified Research Analyst. She finds interest in investing and personal finance. Outside of work, you can find her painting, reading and going on long walks.
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